Consumers repaying debts to counter effects of inflation, interest rates: Debt Index

An increasing number of South African consumers are facing up to their debt, taking action to repay it to counter the effects of inflation and interest rates.

This is one of the findings of the latest DebtBusters Q4 2022 Debt Index, released on Thursday.

Benay Sager, head of DebtBusters, said it was significant and positive that debt counselling enquiries rose by 53% between October and December 2022, compared to the same period in 2021. He said the full impact of successive interest rate increases since November 2021 and elevated levels of inflation are now evident in consumer finances.

“Though it seems counterintuitive, 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,” he said. 

The quarterly review of data provided by consumers who apply for debt counselling, found that enquiries rose by 53% between October and December 2022 compared to the same period in 2021 (Q3 2022, 30%).

 “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,” said Sager.

He said ironically it was a series of interest rate reductions which started in Q2 2020 that contributed to the pressure many consumers are now experiencing.

These rate cuts resulted in associated decreases in the average interest charged for bonds and vehicle finance. The attractive rates 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 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.
• A higher debt-service burden — On average, before entering debt counselling, people spend 63% of their take-home pay to service debt. Debt-to-income ratios were at an unsustainably high 161% among those with take-home pay of R20,000 a month or more.
• Unsustainably high levels of unsecured debt — Unsecured debt levels were, on average, 21% higher than in 2016 and 50% higher for people with take-home pay of R20,000 a month or more. This is a direct result of people using unsecured credit to counter inflation eroding their income.

Consumers who successfully completed debt counselling in Q4 2022 paid back more than R400m worth of debt to their creditors as part of the debt counselling process, the company said.

Tough times ahead as South Africans face financial crises

The Ombud for Banking Services, Reana Steyn, is advising cash-strapped South Africans to approach their credit providers timeously to communicate their financial problems.

“It is our experience that banks will explore multiple options to find the best possible solution tailored for the specific issue faced by the customer,” said Steyn on Thursday. 

“Many South Africans face the prospect of a tough 2023. Inflation is the highest it has ever been, and the repo rate has steadily risen with more increases expected in the near future. Further stress is applied to the majority of consumers through (regular) significant increases in both petrol and diesel prices, which not only impact car owners, but also have a knock-on effect on the price of other items such as food and transport.

“All these increases have negated the financial relief initially offered by the rate reductions of 2020,” said Steyn. “Our concern is that South Africans are now feeling the brunt of these increases, with rising living costs eventually influencing the number of consumers forced to default on their debt payments.”

Increasing numbers of defaulters may in turn increase the number of creditors instituting legal action for the foreclosure/repossession of financed goods.

She said statistics show that many South Africans are borrowing money to get them to the end of the month. “Without a workable plan in place, there will be increased instances of South Africans defaulting on their credit payments which puts them in a compromising position.”

While managing a potential financial crisis will cause a lot of stress within households, she said the first step is to draw up a monthly budget, make provision for emergency savings, and make cuts to monthly expenditure, where necessary.

Steyn advised those who are struggling to repay their debts (or anyone who foresees that they will not be able to pay their debts in the near future) to urgently contact their credit providers to seek assistance.

“This may be the difference between keeping possession of your assets or having them repossessed and, while not ideal, making alternative arrangements may be the only way to avoid having a judgment and an impaired credit profile in your name.”

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