ATM Card as Collateral

There are people who make a business out of informally lending people money. We call these lenders sometimes by their derogative term as “loan sharks” depending on their business practices.

They exist in every country. They usually demand some sort of collateral from the borrower. This can be anything that the borrower own such as small items like jewelries, mobile, small electronic equipments and any item that can be carried by hand.

In the Philippines some of them demand the ATM card of the person as collateral for them to lend them money. Is this legal at least in the Philippines? According to the law in the Philippines it is perfectly legal for someone to use his ATM card as a collateral when borrowing money. The government is however trying to put a law to prohibit this.

Is it safe for the borrower to use his ATM card as collateral? It is quite safe as long as the borrower keeps his ATM PIN number secret from everyone including the lender of his loan. They can also declare their ATM card lost or stolen so their old ATM card would be cancelled and they would be issued a new one.

Does it mean that the ATM card of the borrower is not a good collateral for the lender? The answer is “NO”. Remember that using an ATM card as collateral is legal in the Philippines to secure a loan so all the lender needs is a "Proof" that the borrower used his ATM card as a collateral to them.

This will "Bind" the borrower to his loan with the lender. He cannot declare his ATM card lost or stolen because the lender can use the collateralised ATM card and the written contract of indebtedness as proof of the loan payment obligation of the borrower.

When the borrower is about to pay his debt to the lender they escort the borrower to an ATM. The lender then hands over the ATM card to the borrower so they can use their ATM card to withdraw money to pay their debt to the lender. There could be other arrangements besides this.

I also found an online pdf article from Current Anthropology dated August 2014. It is titled “Deeper into a Hole?” Borrowing and Lending in South Africa. On page S20 on item 3 there are wordings there that illustrate the same “ATM card as collateral” being demanded by lenders to borrowers. The lender can impose as much as 50% interest for such loans. On my online research I found no other countries where similar situation exists.

Conclusion

As can be seen in such countries as the Philippines and the African continent these informal lending transaction is happening and is a business for those with capital. It is subject to abuse though for both the borrower and lender as each can deceive each other because it is an informal transaction.

A better arrangement and one which could be beneficial for both parties is one where the companies or the source of payment is involved. This would ensure that the most important aspect which is guaranteed return on investment is settled. Government should also regulate this to ensure no crime is committed.

This is after all a regular source of lending transaction that came from the market itself. There was a need from the borrowers which was a source of funding and a supplier of the need which are people with capital. The collateral could be anything not even the ATM card it is just a convenient form of collateral. We are looking at a simple banking transaction that is informal.