Consumers turning to monthly loans to settle rising debt

Costly payday loans have become a vital lifeline for many South African households to make ends meet.

DebtBusters’ latest Debt Index report found despite inflationary pressure subsiding somewhat, consumers continue to use short-term loans to pay monthly debt as inflation’s cumulative effect, with persistent high interest rates, erode their income.

If one considers since 2016, electricity tariffs increased by 135%, petrol prices doubled and inflation’s compounded impact is a 46% increase in CPI, it is perhaps not surprising 82% of consumers who applied for debt counselling in Q2 2024 had a personal loan

—  DebtBusters’ latest Debt Index report

According to the report there is an increased demand from consumers for debt management, with debt counselling inquiries up by 18% and online debt management up by 12% compared with the same period last year.

“If one considers since 2016, electricity tariffs increased by 135%, petrol prices doubled and inflation’s compounded impact is a 46% increase in CPI, it is perhaps not surprising 82% of consumers who applied for debt counselling in Q2 2024 had a personal loan,” the report said.

“A further 53% of consumers had a one-month (payday) loan — indicating consumers continue to supplement their income with short-term unsecured credit and personal loans, especially one-month loans have become a lifeline for many.

“These payday loans have become a lifeline for many households but are expensive with interest rates often in excess of 25% per annum,” the report stated.

Benay Sager, executive head of DebtBusters, said: “When the interest rate increases began people started to feel the increasing pressure of servicing asset-linked debt. The average interest rate for a bond went from 8.3% per annum in Q4 2020 to 12.3% in Q2 2024.

“More alarmingly, the average interest rate for unsecured debt is now at an eight-year high of 26% per annum.”

But it’s not all bad news.

“The median debt-to-annual-income ratio is stable and has been low for the past four quarters. While still high at 105%, it is much lower than levels seen in the past few years,” said Sager.

The Debt Index report found compared with the same period in 2016, people who applied for debt counselling:

• Had significantly less purchasing power — since 2016 nominal income has increased marginally by 2% but the cumulative impact of inflation is 46%. This means today’s pay packet buys 44% less than eight years ago.
• Have a high debt-service burden — on average, these consumers need 62% of their take-home pay to service debt. Those earning R35,000 or more a month spend 68% on debt repayment. Debt-to-income ratios for top earners are at or near the highest-ever levels. For people taking home more than R20,000 a month the ratio is 128% and for those earning R35,000 or more it is 167%.
• Have high levels of unsecured debt if they are top earners — on average, unsecured debt levels were 12% higher than in 2016. However, this is lower than in recent quarters and is a positive trend. For those taking home R35,000 or more, unsecured debt levels were 38% higher than eight years ago. While this is on par with inflation, in the absence of meaningful salary increases it indicates consumers need to supplement their income with unsecured debt.