82% of SA consumers in dire financial straits

South African consumers are becoming more indebted in certain categories, during a time when unemployment in the country is at a record high and the Gross Domestic Product (GDP) continues to fall.

Before the pandemic, advisors would tell you if your debt to income ratio was healthy and sustainable. Then it was not nearly as difficult as now to balance your expenses with your income. However, after the pandemic, it seems that these guidelines are not of much use, as people are buying food on credit just to survive.

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Just over four out of five (82%) South African consumers indicated in a recent survey that their household income has been negatively impacted by Covid-19. In addition, 84% of these consumers are concerned about their ability to pay bills and loans, while 31% expect to run short within one month.

These figures were determined by the latest TransUnion Financial Hardship Survey in South Africa that also showed an increase in outstanding balances across most product categories.

During the fourth quarter of 2020 credit enquiries, that are used to measure consumer demand, as well as originations that are a function of supply and demand, decreased across all major consumer credit categories.

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During the same time, delinquencies continued to climb for most products with the exception of credit cards, which saw a marginal improvement. The increase in missed payments also contributed, in part, to an increase in outstanding balances across most product categories.

Vehicle finance balances increased by 10.2% year-on-year during the fourth quarter of 2020. The latest TransUnion South Africa Vehicle Pricing Index (VPI) showed a 9% fall in agreement volumes, but a 9.6% increase in the VPI for new vehicles.

Unpaid debt for credit cards was also down by 10 basis points year-on-year in the fourth quarter of 2020). Vehicle finance loans delinquency rates also remained broadly unchanged, increasing by just 20 basis points over the same period.

The relatively stable performance of vehicle and credit card debt compared to other categories indicates the relative payment priorities of South African consumers. They focus on preserving their credit card use, especially for online purchases and the convenience and perceived safety of using a private vehicle during the pandemic.

Home loan balances increased by 6.1% year-on-year during the fourth quarter of 2020, illustrating that consumers are investing in their homes. This is largely due to working from home during the pandemic, as well as improving affordability thanks to interest rates at an all-time low.

Total outstanding balances for home loans were also boosted by a 31.6% year-on-year increase in the average new home loan.

Some of the growth in balances across most categories was the result of interest that accumulated on unpaid balances because people could not pay their debts.

As in the previous two quarters, credit card debt was the only consumer credit product that did not record an increase in balances, which was broadly stable at – 0.6% year-on-year.

“Challenging economic conditions mean household finances remain stretched and consumers and lenders continue to be cautious about credit. Consumers now have to make difficult decisions about which debts to prioritise,” Carmen Williams, director of research and consulting for TransUnion South Africa says.

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However, there is also good news. She points out that, although annual trends indicate a challenging credit market, measurement recent quarters indicate a road to recovery, although there is still significant uncertainty around the vaccine rollout, general easing of restrictions and the rebound in macroeconomic conditions.

“We have a dismal track record regarding debt and defaulting on repayments is nothing new, but the onset of Covid-19 has brought with it a debt pandemic that we need to recognise and rectify,” says Sebastien Alexanderson, CEO of National Debt Advisors (NDA).

He says a recent analysis of the NDA’s customer book shows the far-reaching effect of Covid-19 had on the finances of South Africans. “Between March and December 2020 the analyses of our National Debt Advisors Research Department showed that Covid-19, the lockdown and subsequent interruption of income had a negative impact on the finances of 80% of South African households.”

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About 10% of the NDA clients missed payments or made short payments on home loans and vehicles. Unsecured debt had the highest non-payment rates. Up to 40% skipped retail store payments and nearly 60% skipped personal loan payments.

In addition, the latest Consumer Default Index (CDI) from credit bureau Experian indicates that people skipped personal loans, while payments on credit cards and retail store accounts improved steadily, as many people have resorted to buying necessities like food or school clothes on their credit cards or store accounts.