Consumers worse off now than in 2016, as debt counselling inquiries increase by 53%

Indebted consumers were much worse off in the fourth quarter of 2022 compared to 2016, although an increase in debt counselling inquiries shows that they are proactive in managing their debts to counter the effects of inflation and increasing interest rates.

According to the DebtBusters’ Q4 2022 Debt Index, released yesterday to coincide with the launch of National Debt Awareness Month, debt counselling inquiries increased by 53% between October and December compared to the fourth quarter of 2021 and subscriptions for online debt-management tools by 130%.

Compared to 2016, when DebtBusters first started analysing the data, consumers who applied for debt counselling in the fourth quarter had:

• 39% less purchasing power. While nominal income was on par with 2016, in real terms South Africans could buy 33% less with the money in their wallets than six years ago when cumulative inflation is factored in;
• A higher debt-service burden. People spent on average 63% of their take-home pay to service debt before entering debt counselling. Those taking home R20 000 or more used 68% of their income to repay debt. For consumers with R10 000 a month take-home pay, the debt-to-income ratio was 125% and for those with takehome pay of more than R20 000, it was 161%; and
• Unsustainably high levels of unsecured debt. Unsecured debt levels were, on average, 21% higher than in 2016 and 50% higher for people with take-home pay of R20 000 a month or more. This was a direct result of people using unsecured credit to counter inflation eroding their income.

The DebtBusters index is a quarterly review of data provided by consumers who apply for debt counselling.

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Full impact of successive interest rate increases

“This is the clearest evidence yet that consumers are facing up to their debt and taking the necessary steps to do the responsible thing and pay it back,” says the head of DebtBusters Benay Sager.

The full impact of successive interest rate increases since November 2021 and higher inflation rates are now fully evident in consumer finances, he says.

“Although it seems unexpected, activity increased as interest rates rose because consumers supplement their income with credit, using unsecured loans as a lifeline.”

The data proves this with the average loan size increasing by 31%, while 96% of consumers who applied for debt counselling in the last quarter of 2022 had a personal loan.”

It was, ironically, a series of interest rate reductions starting in the second quarter of 2020 that contributed to the pressure many consumers are experiencing now, Sager says.

“These rate cuts resulted in associated decreases in the average interest charged for bonds and vehicle finance. The attractive rates encouraged people, especially younger consumers, to buy vehicles and houses.”

However, when interest rates began to rise again in late 2021, consumers started to feel the increased burden of servicing asset-linked debt, with the average interest rate for a bond increasing from 8.3% in the fourth quarter of 2020 to 10.8% in the fourth quarter of 2022.

How debt counselling helps

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Sager says debt counselling is a tried, tested and effective tool for overindebted consumers.

“While under debt counselling, interest rates for unsecured debt can be reduced by over 90%, from an average of 23.6% to 1.9%, which allows consumers to pay back their expensive debt quicker.”

DebtBusters’ National Debt Awareness Month campaign is aimed at informing consumers about managing debt and the effect of rising interest rates.

This year’s theme is: “More consumers than ever are facing up to their debt.”