While this is perfectly legal and might help provide the borrower with access to finance, and even a competitive interest rate, there are dangers,” said Ramothata. “Borrowers must be 100% certain about whether they’re selling or ceding their security.” He points out that the peril lurks in the fine print, in wording that can suggest that the borrower is selling his or her collateral, or has the right to repurchase after the contract has been signed. “Borrowers can find themselves at the mercy of a contract that forces them to surrender the security on default,” he says. “And there’s another twist that happens regularly: the lender is not obliged, even at the request of the borrower, to cash in on the collateral and settle the outstanding balance, thus prolonging the term of secured loan and the interest accrued.”
Help, however, is on the way, says Shimone Fontes, legal advisor at the MFRC. She says that loopholes in the cession process that can cause headaches
for borrowers are dealt with better in new consumer protection legislation due for enactment. “The MFRC has intervened on behalf of clients on a number of occasions, but the current legislation is not specific enough to cope effectively with some aspects of cession manipulation by certain lenders,” says Fontes. “Tougher laws will deal with the way some lenders convolute contracts and hold borrowers over a barrel. ”Problems can arise when micro-lenders obtain security by getting borrowers to cede insurance policies or fixed deposits to them. Unless the borrower specifically demands otherwise, the lender will have the option in the loan agreement whether he wants to cash the policy in on behalf of the client or not. If he elects not to, he can continue to demand interest from the borrower, but never cash in the policy. This means the interest will accumulate until such time that it has covered the value of collateral.