Cost-of-living struggle will affect consumer debt repayments – Here’s how you can survive

The cost-of-living struggle is affecting consumer debt repayments as consumers are pushed into financial distress by high food and fuel prices, as well as high interest rates. Consumers are taking home less income but paying a lot more for the same goods compared to a year ago while they also have to deal with expensive debt as interest rates and inflation take their toll.

South Africa’s annual consumer price inflation increased to 6.5% in May, the highest since January 2017 when it was 6.6%. Transport and food made up just over half of the annual rate.

In May 2021, consumers paid R729 to fill a 45-liter tank with petrol and R1,134 to fill a 70-litre tank with diesel. In May 2022 it cost R1 065 to fill up that same tank with petrol and R1,656 to fill the tank with diesel. Transport costs increased by almost 16%. During the past year, the price of the basic food basket also increased by almost 12%, with sunflower oil used for cooking increasing by almost 40%.

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Debt is becoming more expensive

Interest rates are also increasing, with three more expected rate hikes this year which means that the cost of consumer debt repayments are also increasing. In addition, South Africa is expected to see incredibly constrained economic conditions throughout the rest of 2022 and increasingly financially distressed households.

“The cumulative impact of all these factors on household income is immense. One of the biggest burdens on consumer finances is ever-increasing energy costs, which have a direct impact on the price of general goods and services. Add to that the impact of load shedding, failing municipal infrastructure, depressed business confidence and supply chain shocks and you have a rather distressing outlook for an already ailing South African consumer,” says Tej Desai, CEO of Alefbet Collections and Recoveries.

“People are taking home less income and paying a lot more for the same goods than they were a year ago, while increasing interest rates will also increase their debt servicing costs. Over-indebted consumers, especially those with a greater proportion of unsecured credit, are likely to become more indebted as their debt servicing costs shoot up, alongside living costs.”

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Take a proactive and disciplined approach to debt

Desai says the most important thing to do now is for indebted consumers to take a proactive and disciplined approach to paying off their higher interest-bearing debt and proactively engage with their credit providers if they find themselves in difficulty and unable to service their monthly debt repayments.

“Our data over the last six months shows that the ability of consumers to pay is deteriorating as we see a decreasing trend in the number of payers and average monthly repayments. Simultaneously, we are seeing an uptick in call/contact avoidance, as borrowers fear the implications of being in financial distress.”

However, Desai says, it is important for consumers to know that creditors are not oblivious to the impact of the pandemic and prevailing economic conditions. We see a shift in creditors wanting to preserve the customer relationship, moving from a posture of “when can you pay” to “how can we help you”. 

“Creditors are open to engaging and finding opportunities to renegotiate payment and credit terms where there is genuine financial distress and where borrowers demonstrated a consistent willingness to pay.”

He says as debt collection agents, they play an integral role in facilitating these discussions and negotiations on behalf of credit providers.

“South Africa’s credit providers are ready to restructure debt with a more customer-centric, empathetic approach given the unprecedented circumstances we find ourselves in.”

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Tips for indebted consumers

Indebted consumers should use this opportunity to reach out proactively and negotiate before they default and find themselves caught up in costly and stressful legal collections process:

• Talk to your creditors if you are at risk of defaulting on your consumer debt repayments and never ignore your creditors and debt obligations as the debt will not go away without action.
• Prioritise your expensive debt and if you can, increase the amount you pay back each month, starting with your debt that has the highest interest rate.
• As you pay off one debt or credit arrangement, divert the money you were already paying to top up your next repayment to reduce your term and interest.
• Be careful of using your home loan equity to consolidate your debt. Do not put your home at risk by using up all the equity in your bond and then fall behind on your repayments. Although the interest rate may be lower on a home loan, the repayment term is much longer and you will end up paying a lot more.
• Think very carefully about debt review. While debt review can be an option for a heavily indebted consumer, it is not a process that you should enter into lightly. Once you are in debt review, you cannot obtain any new credit and you cannot exit the process until you have settled all your debts except your home loan.
• Cut discretionary spending and avoid the bad debt trap by taking a good look at your spending habits. Avoid those that lead you into unnecessary and impulsive spending traps by budgeting consistently and staying on budget.
• If you are retrenched, check whether you have credit insurance on some of your loans, retail accounts and credit cards which are there to protect you if you are retrenched and unable to service your debt.
• Protect your credit score to get lower interest rates. Your credit score is a vital financial measure that can be an enabler or hindrance, depending on how well you manage your available credit and debt repayments.