The high rate of indebtedness of South African consumers is a culmination of several years of a tough economic situation, inflation and, more recently, an increase in interest rates, according to DebtBusters.
The debt management company’s head, Benay Sager, said that the state of indebtedness did not occur overnight.
“Consumer debt does not arise overnight – it takes a long time to build up and, therefore, it also takes a long time to deal with it,” Sager said.
One of the findings from DebtBusters’ quarter four 2022 Debt Index, released on Thursday to coincide with the launch of National Debt Awareness Month, was that a sustained, significant growth in demand for debt management services pointed to increasing numbers of South African consumers being subjected to raised interest rates and high inflation.
It also indicates that South Africans are facing up to their debt and taking action to repay it.
The quarterly review of data provided by consumers who applied for debt counselling found that enquiries rose by 53% between October and December last year compared to the same period in 2021 (Q3 2022, 30%). People who subscribed to DebtBusters’ online debt management tools increased by a massive 130%.
“In our view, this is the clearest evidence yet that consumers are facing up to their debt and taking the necessary steps to do the responsible thing and pay it back,” Sager said.
He said the full impact of successive interest rate increases since November 2021 and higher inflation rates were now fully evident in consumer finances.
“Although it seems counter-intuitive, lending activity has increased as interest rates have risen because consumers supplement their income with credit using unsecured loans as a lifeline. The data bears this out: average loan size increased by 31% and 96% of consumers who applied for debt counselling in the last quarter of 2022 had a personal loan.”
Sager said, ironically, it was a series of interest rate reductions starting in quarter two of 2020 that had contributed to the pressure many consumers are currently experiencing.
These rate cuts resulted in associated decreases in the average interest charged for bonds and vehicle finance and encouraged people, especially younger consumers, to buy vehicles and houses.
When the interest rates began to rise again in late 2021, these consumers started to feel the increased burden of servicing asset-linked debt. The average interest rate for a bond went from 8.3% in quarter four (Q4|) 2020 to 10.8% in Q4 2022.
Compared to 2016, when DebtBusters first started analysing the data, consumers who applied for debt counselling in Q4 2022 had 33% less purchasing power.
While nominal income was on par with 2016, when cumulative inflation is factored in, in real terms, South Africans could buy 33% less with the money in their wallets than six years ago.They also had a higher debt-service burden on average.
Those taking home R20 000 or more use 68% of their income to repay debt. For the top two income bands, those with R10 000 a month take-home pay and those with R20 000 or more, the debt-to-income ratios were 125% and 161%, respectively.
Unsecured debt levels were, on average, 21% higher than in 2016 and 50% higher for people with a take-home pay of R20 000 a month or more. This was said to be a direct result of people using unsecured credit to counter inflation eroding their income.
DebtBusters said South African consumers should do the responsible thing and face up to their debt because not dealing with this debt makes it difficult (if not impossible) to invest in one’s future.
“In our experience, most consumers need help to deal with their debt –sometimes, this takes the shape of budgeting advice, sometimes it takes the shape of debt counselling. Assistance could occur in many different ways, but our first advice to consumers would be to check out their debt profiles for free on debtbusters.co.za so they can understand and better gauge their debt situation,” it said.
It added that from its experience, it generally took a few years to stabilise a situation where a consumer was under financial distress. However, the set of interventions should ideally be made up of a mixture of short- and long-term solutions.
In the short term, consumers should revisit their budgets and continue to spend their money in prudent ways — pool resources together with others whenever possible. For the long term, it said consumers should deal with the most expensive debt (highest interest rate) first, and then work through the largest items in their expenditure to lower what they spend on each large-ticket item.
“Consumers should also be mindful that each additional loan or credit they take on is likely to come at a higher interest rate than the previous one, so they should manage very carefully how much new credit they take on.”
DebtBusters said credit and lending were cornerstones of any economy, including the South African economy.
Generally, lending increases as the interest rates rise.
“What we observe in South Africa at the moment is that, especially since 2020, lenders are still cautious, and lending is still tight. Debt counselling is a very effective mechanism for consumers who need it, but it is not a quick fix – it often takes a few years to complete the programme. Our experience is that consumers who complete debt counselling successfully do well in the long term, and this does not have a long-term impact on their credit standing,” Sager said.
He said that much like the rest of the world, a difficult year awaited the South African consumer.
“We believe the impact of the higher interest rates, inflation and load shedding will continue to dominate South African consumers’ finances during 2023 and beyond. For each of these three drivers, consumers should try to put in place interventions that work for them so that they can minimise the impact.”
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