Debt index shows consumers are battling with debt and stagnant incomes

A debt index for the first quarter of the year shows that consumers are still battling to pay their debts while their incomes remain stagnant. In addition, persistently high interest rates and inflation, especially food inflation, continue to erode their disposable income, while a lack of any meaningful economic growth is constraining salaries.

According to the DebtBusters’ Q1 2024 Debt Index the debt-to-annual-income ratio has remained stable for the past three quarters at 107% and although it is lower than 2023 levels, this is still high.

The quarterly analysis of data from debt-counselling applicants also found that demand for debt management increased, with debt-counselling enquiries rising by 22% and the use of online management services up by 30% compared to the same period last year, Benay Sager, executive head of DebtBusters, says.

“Although the improvement in overall debt levels combined with consistent monthly repayment trends are positive, the impact of increased interest rates on asset-linked debt is particularly evident in the 40+ age category.”

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The average interest rate for a bond has increased from 8.3% per year in the fourth quarter of 2020 to 12.3% in the first quarter of 2024. For a R1.5 million bond, this adds an extra R4 000 per month to the monthly instalment.

High-income earners use debt to keep up with their lifestyle

“What also continues to be apparent is how higher-income earners use credit to offset the dual impact of inflation and interest rates, which are now 475 basis points higher than in 2020. These consumers typically have more short-term loans than those in other income bands and devote a greater proportion of their income to repaying the money they borrowed.”

Compared to the same period in 2016, when DebtBusters first began analysing the data, the Debt Index for the first quarter of 2024 found:

• Buying power diminished by 47%. Nominal incomes are 1% lower than in 2016 while the cumulative impact of inflation over the eight years is 48%. While some income groups saw a real increase in incomes, on average the trend was slightly downwards. This means that in the last eight years, average net incomes (take home pay) decreased by 1% while inflation increased by 48%. This means that in real terms most South Africans had 49% less disposable income in 2024 compared to 2016, due mainly to the impact of high inflation.
• The debt-service burden is high, with the average debt-counselling applicant using 62% of their net income to repay debt. The situation is worse among higher income earners. The debt-to-income ratio for people taking home more than R20 000 per month is 127%, while it is 172% for those earning R35 000 or more. These ratios are at or close to the highest ever.
• Top earners have unsustainably high levels of unsecured debt. While average unsecured debt levels are up 14% compared to 2016, this is lower than recent quarters and is a welcome trend. What is concerning is that for people earning R35 000 per month and more, unsecured debt levels are 41% higher. This is in line with inflation and indicates that without meaningful salary increases, these consumers are using debt to supplement their income. The average interest rate for unsecured debt is now at an eight-year high of 25.7% per year.

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New applicants for credit also face high interest rates

Since late 2022, the impact of successive interest rate increases resulted in higher average interest rate offered to new applicants. In the first quarter of 2024 the average interest rate for unsecured credit was 25.7%, while the average interest rate for a financed vehicle was 15.4% and the average interest rate for a bond was 12.3%.

Sager says bonds are very sensitive to changes in interest rates and there was a big swing from 2020 to 2023. Unsecured debt interest rates have also been increasing and are at the highest level in the last eight years. The unsecured debt interest rate has a big impact on what percentage of incomes are needed to service debt.