Consumers warned about getting trapped in debt spiral

Consumers are warned about getting trapped in the debt spiral, as rising inflation and interest rates add to their financial pressure. It is now more important than ever before for consumers to reduce the cost of credit and protect their assets.

The past six years showed a material decline in disposable income and a higher debt burden are contributing to the financial challenges many South African consumers face as indicated by the increased demand for debt counselling, with inquiries increasing during the first quarter of 2022 by 32% compared to the first quarter of 2021.

According to DebtBusters’ latest Debt Index, a quarterly debt report compiled from data provided by clients who have applied for debt counselling, nominal income has declined marginally but, when the effect of cumulative inflation over the past six years is considered, South Africans have 31% less disposable income.

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This is where the debt spiral starts

How do they fill the gap? They borrow again to make up the shortfall in real income. This is evident in the unsecured debt levels which are 20% higher than in 2016. For those taking home more than R20 000 a month, unsecured debt has increased by 54%, which is unsustainably high.

This high debt level has consequences as consumers have to spend about 62% of their take-home pay to service their debt. Even more alarming is that debt-to-income ratios are at their highest levels in the past six years for the top two income bands.

The ratio for those taking home more than R10,000 per month is 125% and 150% for those with take-home income of R20,000 or more per month.

“Although the average loan size increased by 27% over the six years, the number of debt obligations declined by 18%, indicating that while consumers have more debt per credit agreement, they are seeking help sooner.”

Sager says that is particularly important in an environment where interest rates and inflation are increasing.

“In these circumstances, consumers need to do everything possible to reduce the cost of credit and protect their assets. For those unable to do so without help, debt counselling is the best option available.”

Debt counselling can help reduce unsecured debt interest rates significantly and allow consumers to pay back expensive debt more quickly. Last year this enabled DebtBusters’ clients to pay back R2 billion to creditors.

“The number of consumers who successfully finish debt counselling today is nine times higher than in 2016.  In fact, consumers who finished debt counselling in the first quarter of 2022 paid back R400 million while they were under debt counselling.” 

Sager says that there was a noticeable increase in men applying for debt counselling and during the first quarter, 57% of new applicants were male, compared to 48% in the same period in 2016.

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Consumers drowning in debt

Neil Roets, CEO of Debt Rescue, also says the fuel price reprieve was too little too late to save consumers from drowning in debt after months of debilitating petrol price increases, culminating in record hikes in March and April on the back of soaring global oil prices.

The latest petrol price announcement dashed the hopes of motorists who were hoping for a substantial drop after months of increases.

“Although the news of any small petrol price reduction is welcome, it is simply too little too late to have any effect whatsoever on the pain consumers continue to endure when purchasing fuel at the pumps.”

He says petrol and diesel prices have surged by more than a third over the past year and we need a long-term solution. Roets believes that government’s efforts to rescue consumers will not save the vast majority of consumers who were hit with consistent petrol price hikes for over a year and who are now living on credit to get through each month.

The fuel price hikes are just one of a volley of living cost increases South Africans have been pummelled with over the past few months and now a substantial portion of households can no longer afford even basic goods and services.

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Dire situation of not enough money for electricity and basics

“Our most recent consumer survey shows that 72% percent of people can no longer cover their household electricity needs, while an astronomical 88% have had to cut back sharply on basic goods and services to manage their increased living costs.”

A recent study by Genesis Analytics, in partnership with the Financial Sector Conduct Authority (FSCA), also concluded that over-indebtedness remains a challenge in South Africa. More than 50% of South Africa’s credit-active consumers can be considered to have too much debt, which resulted in bad credit records for 48% of all borrowers.

Experts at National Debt Advisors (NDA) say it is hard to believe that nearly half of the 27 million adults using credit have difficulty keeping up with debt repayments. The NDA found that the number of South Africans undergoing debt review in the last two years increased by almost 8% from 2020 to 2022.

Over-indebtedness is linked to national economic conditions and exacerbated by the Covid-19 pandemic. Add to that slow economic growth and high unemployment, coupled with rising prices for food, petrol and other basic goods and the significant impact on the credit needs of South Africans and their ability to repay debt becomes clear.

Sebastien Alexanderson, founder and debt counsellor at NDA, says money issues not only affect consumers’ pockets, but also their emotional, physical and mental wellbeing.

“The trick for staying debt free is to start with the most basic financial step – simply draw up a budget and stick to it as far as possible,” says Alexanderson.