Illegal lending is a scourge in every society. Yet loan sharks continue to thrive all over the world. The reason for this is the simple law of supply and demand: there are individuals in desperate need of money, who often do not have access to the banking system, and greedy moneylenders who are willing to provide it, at a price. The symbiotic nature of the relationship makes it difficult to eradicate this menace.
In the UAE, many people on low incomes are unable to borrow from the banks, so loan sharks are the last resort. This newspaper has repeatedly highlighted this problem. One obvious risk of borrowing from these people is that they charge high rates of interest – as much as 120 per cent per annum in some instances – meaning that a modest loan can quickly turn into a burden that is difficult or impossible to repay. This is when the lenders turn menacing, which is why the note of caution sounded by Pearl Cabal, a legal consultant at Gulf Law in Dubai, must be heeded. As The National reported yesterday, Filipinos planning to go to illegal money lenders have been warned not to compound their problems by handing over their passports as guarantees for loans, or by agreeing to unreasonable interest rates. But what's the alternative?
One solution could be to take advantage of pawn shops. Pawnbrokers lend money on items of value that range from jewellery to household goods, tools and bicycles, among others. There are many advantages. For example, there is no credit check, and a co-signer is not required. All the customer needs is collateral to guarantee the loan. Secondly, it won’t spoil the borrower’s credit score if they can’t make a payment. If the item is not redeemed, the pawnbroker will just appropriate it and sell it. Moreover, these items usually maintain their value over a reasonable period of time and are easy to store. Third, customers can negotiate the amount they want to borrow.
Using a pawnbroker might seem to be easier and more convenient than getting a bank loan, but it has its downsides, too. One is that appraisals are usually very low, which means a customer might get much less cash for an item than its actual market value. Two, stolen goods can end up in the pawnshop, creating a problem for buyers. Finally, interest rates can be outrageous. However, many of these hurdles could be overcome if pawnshops are regulated by police departments as well as the UAE’s Central Bank.
