South Africans rely on payday loans to afford electricity and fuel

Consumers now have to opt for payday loans to afford electricity and fuel and make provision for other inflationary pressures. In a recent survey, 53% of people who applied for debt counselling had these one-month loans.

Benay Sager, executive head of DebtBusters, says despite inflationary pressure somewhat subsiding, South Africans continue to use loans to make ends meet as inflation’s cumulative effect together with persistently high interest rates erode their income.

According to DebtBusters’ Debt Index for the second quarter, 82% of people who applied for debt counselling during the quarter had a personal loan and a further 53% had one-month loans. “These payday loans have become a lifeline for many households but are very expensive with interest rates often in excess of 25% per year.”

Inflation has eased but remains at the upper end of the central bank’s range and continues to constrain consumer finances, Sager says. “Since 2016, electricity tariffs increased by 2.35 times, the petrol price has doubled and the compounded impact of inflation is 46%, with all three indicators putting additional pressure on South Africans.”

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Hope for interest rates coming down

While there are indications that the interest rates may finally start to tick down, they have been consistently high for over a year. Although consumers are better able to deal with elevated but stable interest rates, they are still feeling the impact of the successive rate increases that started in November 2021, he says.

“When the interest rate increases began, people started to feel the increasing pressure of servicing asset-linked debt. The average interest rate for a bond went from 8.3% per year in the fourth quarter of 2020 to 12.3% in the second quarter of 2024.

“More alarmingly, the average interest rate for unsecured debt is now at an eight-year high of 26% per year.”

However, Sager says it is not all bad news. The median debt-to-annual-income ratio is stable and has been low for the last four quarters. While still high at 105%, it is much lower than levels seen in the past few years.

“We welcome this, as well as the fact that debt counselling enquiries are up by 18% and registrations for online debt-management tools has increased. It indicates more people are taking action to deal with debt.”

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Debt Index findings

The Q2 2024 Debt Index found that compared to the same period in 2016, people who applied for debt counselling:

• Had significantly less purchasing power: Since 2016 nominal income increased marginally by 2% but the cumulative impact of inflation is 46%. This means that today’s pay packet buys 44% less than eight years ago.
• Have a high debt-service burden: On average, these consumers need 62% of their take-home pay to service debtors. Those earning R35 000 or more a month spend 68% on repayments. Debt-to-income ratios for top earners are at or near the highest-ever levels. For people taking home more than R20 000 a month the ratio is 128%.
• Have high levels of unsecured debt if they are top earners: On average, unsecured debt levels were 12% higher than in 2016. However, this is lower than in recent quarters and is a positive trend. For those taking home R35 000 or more, unsecured debt levels were 38% higher than eight years ago. While this is on par with inflation, in the absence of meaningful salary increases, it indicates consumers need to supplement their income with unsecured debt.

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Unsecured loan size increased by 82% in past eight years

Other important findings in the Debt Index include:

• Since 2016, average unsecured loan size increased by 82% whereas the volume of new unsecured loans declined by 34%. Although the growth in loan size trails that of inflation, larger loans are being granted to a smaller number of consumers, highlighting that risk is being concentrated on an ever-smaller group of consumers.
• The average number of credit agreements (open trades) a consumer has continues to be near historical low levels. When factoring in debt levels, this indicates consumers have more debt per credit agreement and are seeking help faster than before.
• The debt mix for new applicants has shifted over the last few years driven by change in interest rates. Since early 2022, the share of home loan debt has increased and now makes up 26% of new applicants’ debt.