Why consumers have too much month left at the end of the money

Most of us know that feeling of having ‘too much month left at the end of the money”. We live in a cost-of-living crisis where our income grows far slower than our expenses, which means that our money runs out before the end of the month.

The financial strain on South Africans becomes clear in a new report from Eighty20, a consumer insights and data science firm, that highlights the significant impact of formal debt instalments on South African consumers, demonstrated by instalment-to-income ratios.

Financial institutions must ensure new loans comply with the National Credit Act which requires credit providers to assess a borrower’s ability to repay, Andrew Fulton, director at Eighty20, says.  This involves an affordability calculation, evaluating the individual’s income, expenses and existing debt to ensure loan repayments can be met without causing undue financial stress.

It includes your gross monthly income, net monthly income, living expenses, existing debt obligations, the new loan repayment amount and some form of debt-to-income ratio. This process assesses whether your disposable income is sufficient to meet your total monthly obligations.

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When is a high debt-to-income ratio too high?

According to Standard Bank, if your ratio is higher than 43%, you should consider strategies to reduce debt. Benay Sager from DebtBusters is more circumspect, saying: “In our experience, if your debt repayment to net income ratio is over 30% you are in the danger zone. If it is over 40% your financial situation is not sustainable, regardless of the type of debt you are repaying, as indicated by the DebtBusters Money Stress Tracker.”

Fulton says while Debtbusters uses a net income monthly income measure, the most common way a debt-to-income ratio is calculated is by dividing someone’s total monthly debt payments by their gross monthly income, or in other words, income before taxes or other deductions.

In South Africa, the debt-to-income ratio has been notably high. Eighty20’s estimates suggest that this ratio can climb to 54% on average across the population. The Middle-Class segment has a ratio of 56% and the Heavy Hitters stand at 63%.

Eighty20 developed illustrations of a typical income and debt burden for three segments: The Mass Credit Market, Middle-Class Workers and Heavy Hitters. Fulton says these examples aim to present a ‘typical’ instalment-to-income ratio by analysing the subset of people within each segment who have the most common credit product combinations.

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Mass Credit Market earning less than R10 000 per month

The Mass Credit Market segment consists of primarily employed individuals earning less than R10 000 per month, who are mostly women working as entry-level nurses, teachers and administrative staff.

About 80% of this group hold retail store accounts, while 17% have credit cards. Their household income is twice their personal income, with nearly a quarter receiving grants and almost half being single parents.

In the example, an individual in this segment, earning a gross monthly income of R4 900 per month, falling below the tax threshold, has debt instalments totalling R782 per month, mostly retail store card debt. The median instalment-to-income ratio for this segment is approximately 16%, with an average ratio of around 30%.

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The Middle-Class Workers

This segment predominantly consists of married couples striving for a middle-class lifestyle, often juggling car and home loans along with their children’s education costs. Many are dual-income households with substantial debt repayments.

This group holds approximately 30% of all home and vehicle asset finance loans in South Africa, although they account for only 20% of the total loan value. On average, middle-class workers allocate about 56% of their net income to debt repayments. However, in a typical scenario, as illustrated below, the median instalment-to-income ratio is closer to 53%.

The Heavy Hitters

The wealthiest South Africans, known as the Heavy Hitters, are the predominantly male segment with the most assets. This group consists largely of families and despite being less than 10% of the population, holds two-thirds of vehicle asset finance loans and three-quarters of home loans by value.

The segment is diverse in income, with some members just above middle-class earnings, while others receive multi-million-rand salaries. For this analysis, a monthly salary of R42,100 was used. In this example of a typical Heavy Hitter, debt repayments by median calculation account for 66% of net income, with two-thirds of their debt secured.

Fulton says from their analysis, it is evident that credit-active South Africans allocate a substantial post-tax income towards credit instalments, exceeding what regulatory and industry standards deem healthy.

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Why debt-to-income ratios are too high

He says high instalment-to-income ratios in South Africa stem from several factors:

• Higher borrowing costs: Since mid-2021, there were 10 consecutive interest rate hikes, raising the prime lending rate from 7% to 11.75% in 18 months. This had a huge impact on mostly young, first-time home buyers who overstretched themselves in 2020/21 when interest rates were nearly 500 basis points lower than today.
• High cost of living: Inflation consistently exceeded the upper limit of the Reserve Bank’s inflation target throughout 2022 and 2023, with average annual food inflation reaching approximately 7.93% between 2020 and 2023.
• Stagnant, generally low salary growth: DebtBusters suggests purchasing power diminished by 47% since 2016 when factoring in the impact of compounded inflation. If one factors in the big five expenses (food, petrol, electricity, medical aid, school fees) as the real indicator of inflation for middle-income earners, the situation is even more severe than what inflation indicates over the last several years.