Consumers warned against taking on more debt despite third repo rate cut

Consumers are warned not to take on more debt and specifically bad debt, despite the third consecutive repo rate cut by the Reserve Bank in January. This last repo rate cut was possibly the last one for the year as inflation is expected to increase.

For many South Africans who started the year looking for ways to simplify their debt management or reduce financial strain, the recent decision of the South African Reserve Bank (Sarb) to lower interest rates by 25 basis points for the third time in six months may provide some much-welcomed relief.

“The high-interest rate environment of the past couple of years affected many South African households’ cash flow and consumers are counting on these rate cuts to offer them some financial reprieve, as they continue with their money management efforts,” MJ Davis, CEO of FNB Retail Loans, says.

Reduced borrowing costs and lower monthly repayments thanks to repo rate cuts have tremendous potential to free up cash flow and potentially prevent the average consumer from falling into any further financial distress.

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More credit could push you into worse position later

However, Ester Ochse, product head at FNB Integrated Advice, warns consumers not to fall into complacency. “We must be very careful and disciplined. While lower rates make borrowing ‘cheaper’ in the short term, consumers should not be tempted to get into further bad debt which could put you in a worse-off financial position over the long-term.

“We do not know for sure what will happen with interest rates, but at some point they will increase again, making debt instantly more expensive. Therefore, it is wise for consumers to assess their ability to manage debt,” Ochse warns.

“In general, if you are already stretched financially, further debt could lead to more instability if you do not have a solid repayment plan or are not borrowing for productive reasons, such as investing or saving.”

Ochse also notes that lower interest rates also mean lower returns on savings. “While it might feel like you can spend a lot more freely, remember to pay yourself first in savings, before you spend your money elsewhere. You cannot afford to fall behind on your savings. In fact, add a little more to your savings pot monthly now that you have some extra cash flow.”

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How to get out of debt faster

While the lower interest rate environment may ensure that you pay less interest on the debt you owe, Ochse says if you want to get out of debt faster, try to pay higher instalment rates as this will save you interest in the long run.

Davis points out that interest on debt is something that most of us do not fully understand. “The reality is that retail store cards for things like clothing or furniture carry higher interest rates than bank credit cards, for example. Therefore, consumers should ensure they understand the terms and conditions of having these types of facilities.”

Ochse also advises that it is better to save for items that you may not be able to afford right now through savings, group savings or stokvels rather than taking out high interest-bearing store cards. “We see that stokvels work wonderfully and can serve a variety of needs, including saving up for funerals, groceries, school uniforms and at times, even for investments.”

She says this round of rate cuts presents a silver lining for some but for others it might be difficult to see the wood for the trees. Davis points out that you will often find that the average consumer is trying to keep up with an accumulation of multiple unsecured credit products, such as store cards, retail accounts and other types of loans from varying providers, all with varying amounts and varying interest rates. It can be seriously overwhelming.”

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Unable to repay your debt? Call your bank

Davis says if you find yourself in this position, your first port of call should invariably be reaching out to your financial institution. “When people start feeling mild signs of distress, their first instinct is often to hide in shame or sit on the situation and pray that it will somehow work itself out.

“Yet, as a financial services provider focused on providing real help to our customers, we encourage individuals to understand that we exist to help them find solutions to any challenges they might face as it relates to their finances,” he says.

“For every financial challenge you may encounter, there likely is a solution. A quick chat with your bank could reveal avenues for simplifying your finances. It is easy to lose track of different repayment schedules, interest rates and fees.

“But what if I told you, for example, that in a situation where you have multiple debts that try to service and manage, there is a possibility of getting them combined so that you deal with one single account fee?”

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However, Davis and Ochse point out that repo rate cuts and banking products are not quick fixes for poor management of your personal finances. “It is important to carefully evaluate your options when you are in financial distress, work towards implementing the fundamentals of sound money management principles and ensure you speak to your financial services provider about your concerns.”