Positive developments offer golden opportunity to repay debt

Several positive developments in South Africa recently mean that people’s wallets are getting a little healthier as declining interest rates, inflation and fuel costs free up extra cash.

Along with access to some retirement savings, these could provide a lifeline for struggling consumers – but only if they grab it and use it to repay their debt first.

The first thing consumers should do with this extra money is pay off expensive debt, Benay Sager, executive head of DebtBusters, says.

“While the 25-basis point repo rate cut and a slight decline in inflation will provide some relief, it is not significant.

“However, taken with the 20% decrease in fuel costs since May, will contribute to more disposable income for most consumers.

“This and the ability to access some retirement funding will buoy consumer sentiment and enable them to improve their finances. It also provides an opportunity to reduce unsustainable levels of debt that are particularly pervasive among consumers in the upper-income brackets.”

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Debt-to-income ratios show how much debt we have

According to DebtBusters’ most recent Debt Index, for the second quarter, people earning R35 000 or more per month spend 68% of their take-home pay on debt repayment.

Debt-to-income ratios for top earners were also at or near the highest-ever levels.

For people taking home more than R20 000 per month, the debt-to-income ratio was 128% and for those earning R35 000 or more, it was 167%. Neither figure is sustainable, Sager says.

“Although sentiment has improved, the environment is still difficult and uncertain. Consumers should focus on what they can control, to ensure they are well positioned to deal with setbacks as the economy recovers.”

He points out that average interest rates for unsecured debt are at an eight-year high of 26% per year and 82% of people who applied for debt counselling during the second quarter of 2024 had a personal loan.

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Beware of more debt: here comes Black Friday

And with Black Friday coming up at the end of the month, Sager says rather than getting swept up in the euphoria, year-end sales and the festive season, using some disposable income to pay off expensive debt will set consumers up for what may be an unpredictable 2025.

“Leading into the final quarter of the year, a combination of positive developments has provided a rare window for struggling consumers to improve their financial situation. Now would be a good time to take advantage of the opportunity.”