More South Africans have been resorting to personal loans over the past seven years and debt-to-income ratios for top-income earners were now at all-time highs, according to the DebtBusters’ Q2 2023 Debt Index, a quarterly review of data drawn from debt-counselling applications.
Benay Sager, head of DebtBusters, said while the SA Reserve Bank did not increase interest rates last month following a better-than-expected inflation forecast, there have been 10 successive interest-rate increases since November 2021.
“The collective impact of rising inflation and interest rates on consumer finances is very evident in the Q2 2023 data. Average loan size has increased by 78% since 2016 and 95% of consumers who applied for debt counselling during the second quarter of 2023 had a personal loan. Unsecured debt was on average 26% higher than in 2016 and 39% up for those taking home R20 000 or more a month. It is abundantly clear that consumers are using unsecured credit to supplement their income,” Sager said.
He explained that despite high interest rates, inflation was the reason people were borrowing to make ends meet. Although nominal incomes were 1% higher than in 2016, cumulative inflation growth of 39% over the past seven years meant that in real terms people’s spending power has diminished by 38%.
“To understand the pressures consumers are facing, consider what has happened to just the prices of petrol and electricity since 2016. The petrol price has almost doubled and the cost of electricity has gone up by 90%.”
A consequence of people borrowing more to make it through the month was that they were spending more of their income to service debt-on average 66%. Those who were taking home more than R20 000 per month have a debt-to-income ratio of 150% while the ratio for those taking home R35 000 or more was 189%. These ratios were the highest they have been since DebtBusters began analysing debt-counselling applicants’ data in 2016.
Sager said that given these alarming ratios it was no wonder that consumers were feeling more financially stressed. DebtBusters’ annual Money Stress Tracker, one of the largest surveys about how financial stress affected other aspects of South Africans' lives, found respondents who said they were stressed about money had increased from 70% in 2022 to 78% this year. Of these 94% said financial stress was affecting their home lives, 78% their work life and 77% believed it was affecting their health.
“Debt counselling is an effective way to help financially stressed consumers. Unsecured interest rates can be reduced by 90% from an average of 24.8% to ~1.9%, allowing people to pay back expensive debt faster. It can also provide peace-of-mind about assets being repossessed. Successive interest-rate hikes have increased the burden on people servicing asset-linked debt, with the average interest rate on a bond rising from 8.3% in Q4 2020 to 12.2% in Q2 2023. During Q2 2023 there has been an increase in consumers seeking assistance to restructure asset-linked debt so assets are legally protected and cannot be repossessed.”
The number of consumers successfully completing debt counselling has increased more than seven-fold since 2016. In the second quarter of this year alone, consumers who received their clearance certificates paid back over R450 million worth of debt to creditors.
Sager said other good news was the considerable increase in consumers, particularly younger consumers, taking advantage of online tools to manage debt more proactively.
The latest Experian Consumer Default Index (CDI), showed a return to the former trend of long-term deterioration, expedited by the rapid increase in living expenses experienced by South African consumers and exacerbated by the significantly intensified load shedding applied by Eskom during the first quarter this year.
The index tracks the marginal default rate as it measures the sum of first-time defaulted balances within the Home Loan, Vehicle Loan, Personal Loan, Credit Card and Retail Loan portfolios. These were accounts that have never previously defaulted, as a percentage of the total sum of balances outstanding.
The CDI exhibited a Q-o-Q deterioration from 3.93 in December last year to 4.51 in January this year.
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