Most income groups need about two thirds of their take home salary to pay their debts and with no meaningful increase in real income, the combination of rising interest rates and inflation is choking consumers who are borrowing more in an attempt to find breathing space.
According to DebtBusters’ 2022 Debt Index for the third quarter, debt counselling enquiries increased by 30% compared to the same period a year ago, indicating the financial stress consumers are currently experiencing.
The index also shows that an increasing number of inquiries are from consumers who were first-time buyers of assets, such as houses and cars, while interest rates were at historical lows before November 2021.
Consumers earning more than R20 000 per month have the highest total debt to annual net income ratio at 150%, which means they are under the most financial pressure. The total debt to income ratio is the percentage of net income required to pay debts before signing up with DebtBusters.
Debt exposure also significantly increased for consumers earning less than R5 000 per month, with a debt-to-income ratio of 87%, also the highest for this group. This group still requires 65% of its income to pay debt per month.
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Small increases in salaries
Over the past six years average net incomes were flat and this means that in real terms most South Africans had 33% less buying power in 2022 compared to 2016, resulting in the need to supplement this income with unsecured borrowing.
It is, therefore, not surprising that consumers have on average 26% more unsecured debt in 2022 compared to 2016. Those earning more than R20 000 per month have unsecured debt levels of 50% higher than in 2016.
The index shows that total debt levels which include secured and unsecured debt increased by 21% compared to the third quarter of 2016. This increase is lower than inflation and much lower than unsecured debt growth.
This growth in average debt is also supported by National Credit Regulator (NCR) data. Average unsecured loan size grew by 43%, while the number of new unsecured loans shrank by 6% in the last five years, indicating that an ever-smaller pool of consumers is receiving larger unsecured loans.
Although there has been some recovery in the lending environment since the 2020 lockdowns, volumes are not at the same levels as before 2020. Average secured loan size has grown by 28%, significantly less when compared to unsecured loans.
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Historically low level of credit agreements
According to the index, the average number of credit agreements per consumer continues to be near historical low levels at around six per applicant. When factoring in debt levels, this indicates consumers have more debt per credit agreement and are seeking help faster than before, says Benay Sager, head of DebtBusters.
Compared to a few years ago, the consumer age profile of the index indicates increasing financial stress in the 45+ age group.
“While the average new applicant age has been consistent, the share of applicants who are 45 or older has increased from 19% to 25% over the past six years, indicating financial stress is becoming more prevalent in this age category.”
The recent trend, where more men than women are seeking help continued in Q3 2022 with 55% male applicants in the third quarter.
The number of consumers graduating from debt counselling who received their clearance certificates, increased eight-fold since 2016, with these consumers paying over R430 million to their creditors while under debt counselling.
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Twin scourges of interest rates and inflation
Sager says it is clear that the twin scourges of interest rates and inflation are taking their toll.
“The impact of the twin ‘I’s – inflation and interest – is evident in the data, which shows consumers are using unsecured credit to supplement their income. Average loan sizes have increased by 43% in just six years.”
At the same time, the number of debt obligations has decreased from 7.6 to 6.1 per consumer. This indicates more debt per credit agreement and that people are sooner reaching the stage where they are seeking assistance.
DebtBusters first began collating and analysing data for the Debt Index in 2016. A quarter-on-quarter comparison with Q3 2016 starkly shows how inflation has eroded income and rising interest rates are adding to debt-service costs.
Sager says inflation and interest rates are very likely to keep rising into the New Year and South Africans need to do everything possible to reduce the cost of credit and protect their assets.
“People needing help, especially to shield themselves against interest rate increases, they must consider debt counselling because it is a proven and effective way to do this.”
He says it allows consumers to pay back expensive debt faster as interest rates on unsecured debt can be significantly reduced, while agreements with creditors secures assets that are part of the debt-counselling process.