Almost half of the 25.1 million active credit consumers in SA are behind on their payments
- South African consumers, especially middle-income households, are being suffocated by their debt.
- Debt counselling firm DebtBusters says every person who has come to it was spending at least 61% of their net take-home pay in repaying debt.
- The company says consumers’ overall debt levels surged towards the end of 2020 and increased reliance on unsecured lending means little benefit is gained from interest rate cuts.
South African households aren’t managing to keep their heads above water, let alone going back to the habit of repaying their creditors as their incomes have been reduced to a fraction of what they used to be.
When the Covid-19 pandemic hit our shores, South African households who had been dealing with shrinking net take-home pay for some time turned to unsecured debt to try to supplement whatever they were still fortunate enough to earn – as many people took pay cuts or lost their jobs, said debt counselling firm, DebtBusters on Thursday.
DebtBusters released its Q4 2020 Debt Index, which showed that in 2020, households’ reliance on unsecured debt surged in 2020. The company said there was a noticeable increase in households’ overall debt levels towards the end of the year. And then, in January 2021, debt-counselling enquiries that the firm received rose to 40% above what DebtBusters recorded in January 2020.
“The most severely affected are essentially middle-income earners, and that is the majority of the population in South Africa if you think about the employed population,” said Benay Sager, head of DebtBusters.
Sager said consumers’ debt-repayment-to-net-income ratio and their overall debt exposure have reached unsustainable levels.
“Every single individual who has walked through our doors had to use at least 61% of their net income to service their debt. This is not sustainable because what we find from research is that consumers normally need about two-thirds of their net income for their basic necessities,” said Sager.
The middle-income individuals Sager singled out as suffocating the most – those taking home between R5 000 and R20 000 per month – saw both their overall debt and the portion of their income going towards servicing debt rise.
High-income earners who take home more than R20 000 per month did increase their overall debt, but were still spending a lower portion of their income on repayments because their secured debt such as home loans and vehicle finance benefitted from the interest rate cuts in 2020.
The burden of unsecured debt
Sager said based on data of people that went for debt counselling, consumers’ take-up of unsecured debt was on average 32% higher than when DebtBusters began compiling the index in 2016.
Over the years, consumers’ reliance of unsecured lenders not attached to banks has gone up significantly. In the last four years, their contribution to debt that is being managed by DebtBusters through the counselling process has grown from 7% to 9%.
The problem with this spike in the use of unsecured lending is the significantly higher interest rates that consumers pay, which remained elevated at around 21% in the last quarter of 2020, despite the SA Reserve Bank cutting the repo rate by a cumulative 300 basis points in 2020.
“When you look at unsecured debt in 2016, [the interest rate] was around the levels of 25%. By the way, there was nothing illegal with this interest rate,” said Sager.
“But while there has been some relief for the consumer over the last year in terms of reduction in interest rates, that hasn’t really fed down to those with unsecured debt,” he added.