/ 7 February 2024

SA consumers turn to personal loans, unsecured credit to survive

'mashonisa' Debt System's Slow Erosion
File photo

South African consumers are increasingly turning to personal loans and unsecured credit to survive, while businesses hit by load-shedding are paying low wage increases that fail to keep pace with rising interest rates, fuel and food inflation.

It’s not just younger consumers and those in the lower income bands who are battling to make ends meet, according to the latest Q4 2023 debt index released on Tuesday by counselling firm DebtBusters to mark debt awareness month.

According to the index, 2023 was one of the most financially difficult years consumers have endured since 1994 as high inflation and rising interest rates in a straitened economy eroded disposable incomes across all consumer segments.

Data from Statistics South Africa showed that annual consumer inflation was 5.1% in December 2023, the main contributors being food and non-alcoholic beverages (up 8.5%); housing and utilities (up 5.7%) miscellaneous goods and services (up 5.1%) and transport (up 2.6%). Consumer inflation averaged 6% in 2023.

Interest rates are now 475 basis points higher than in 2020, after a number of hikes as the  South African Reserve Bank attempted to rein in inflation. As a result, the average interest rate for a bond grew from 8.3% a year in the fourth quarter of 2020 to 12.3% at the same period in 2023.

Average interest rates for unsecured debt are now at an eight-year high of 25.6%, according to the debt index.

Financially constrained businesses, affected by high costs related to load-shedding, as well as stagnant economic growth, have in recent years not given employees inflation-linked salary increases. This has left consumers without a lifeline to cope with the rising cost of living, the debt report said.

The index showed that consumers who applied for debt counselling in Q4 2023 had 39% less purchasing power than in 2016 and, on average, are now spending 62% of their take-home pay to service debt because of inflation and rising interest rates, DebtBusters, executive head Benay Sager said.

About 95% of these consumers also rely on personal loans to “balance their cash flow” and supplement their monthly incomes, while 24% have short term loans.

The report said Q4 was the second quarter in a row that the median debt-to-annual-income ratio declined. But, at 106%, it remained high, indicating that consumers were still experiencing the effects of the interest rate increases that began in November 2021.

Sager said consumers who had taken out vehicle and mortgage finance when interest rates were low in 2020 were now struggling to find the extra R2 000 to R5 000 a month to service their debt at higher rates. 

He said the debt index showed that consumers in higher income bands were battling, and that more consumers over the age of 45 were seeking debt counselling services than in the past.

“On average, before entering debt counselling, consumers spend 62% of their take-home pay to service debt. Those making R35 000 or more per month use 71% of their income to repay debts,” Sager said.

“The debt-to-income ratio for the top income bands is 131% for those earning R20 000 per month and 171% for people taking home R35 000 or more. For these income bands the ratios are at or close to the highest-ever levels.”

Although nominal incomes were 1% higher than seven years ago, when cumulative inflation of 40% is considered, in real terms the data shows that spending power is down 39%, he added.

Unsecured debt is also, on average, 32% higher than in 2016. For those taking home more than R35 000 a month it is 42% higher, according to the index.

“In the absence of meaningful salary increases, consumers are supplementing their income with unsecured debt,” Sager said.

He said a positive sign was that debt counselling inquiries increased by 46% and demand for online debt management was up 54% compared to the same period the previous year, showing that more people are seeking help to manage their debt.

“Under debt counselling, rates for unsecured debt can be renegotiated from 25.6% to 2.6%. This allows consumers to pay back expensive debt quicker. Interest on vehicle-debt and balloon payments, which average 15.6%, can also be negotiated down and the period extended,” Sager said.