“For instance,” explains Fontes, “a borrower takes a loan for R10,000 secured by a policy worth R20,000.  The lender refuses to cash in the policy.  The lender will let the interest on the loan run up, as long as the amount is covered by the policy.  As soon as the interest on the loan reaches the value of the policy, then the collateral will be cashed in with the borrower getting nothing from the investment.
”Problems can also arise when lenders take other forms of security, such as motor cars and other valuables.  “The borrower could be under the impression that he is putting up his car as security for the loan,” says Fontes, “when, in fact, it’s an outright sale, according to the wording in the contract.  “The danger is that the contract will not be headed ‘Sale Agreement’ while the content of the contract actually is a sale agreement.  So, by signing, the borrower has sold his car to the lender, when he was under the impression that the car was given for security only.”

As a result, the MFRC is not only concerned about the cession of borrowers’ investments, but also when cessions involve moveable assets and the lender is not a registered pawn broker.  “It’s becoming clear, by the frequency of such complaints, that borrowers are simply not paying attention, and there are questions that must be asked when they intend ceding an investment, moveable or otherwise,” she said. The real difficulty lies in the option to cash in policies that lenders write into loan agreements.  “Borrowers should be sure they read and understand loan contracts before they sign,” says Ramothata.  “If the lender and borrower agree on anything that is not in the contract, or that needs to be changed, make sure it is written down and made part of the agreement.  “For example, if the borrower gives the lender security that will mature in a few months’ time and both parties agree that the money from the matured security may be used to pay the loan, then the borrower should ensure that this is part of the contract.  Don’t assume that it will be done.”


The golden rule, he says, is: “Ask questions and make sure you understand and agree with the contents of the contract before signing.”


For more information: Micro Finance Regulatory Council - Midrand - Tel: or log onto www.ncr.org.za

 Ceding or selling your insurance policy
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