South Africans reliant on loans to keep heads above water

Personal loans have become a financial lifeline for consumers to supplement their income over the past seven years, while the debt-to-income ratios for top earners are at all-time highs. Meanwhile, younger consumers use online tools to proactively manage debt.

These are some of the findings from the DebtBusters’ Debt Index for the second quarter of the year drawn from debt-counselling applications. “While the Reserve Bank did not increase interest rates in July after a better-than-expected inflation forecast, there have been 10 successive interest rate increases since November 2021,” Benay Sager, head of DebtBusters, says.

“The collective impact of rising inflation and interest rates on consumer finances is evident in the data for the second quarter. Average loan size increased by 78% since 2016 and 95% of consumers who applied for debt counselling during the second quarter of 2023 had a personal loan.

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“Unsecured debt was on average 26% higher than in 2016 and 39% up for those taking home R20 000 or more a month. It is abundantly clear that consumers use unsecured credit to supplement their income.”

Sager says despite high interest rates, inflation is the reason people borrow to make ends meet and although nominal incomes are 1% higher than in 2016, cumulative inflation growth of 39% over the past seven years means that in real terms people’s spending power diminished by 38%.

“To understand the pressure consumers face, consider what happened to just the prices of petrol and electricity since 2016. The petrol price almost doubled and the cost of electricity increased by 90%.”

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Consequences of borrowing

The consequence of people borrowing more to make it through the month is that they spend more of their income to service debt which is on average 66%. Those who take home more than R20 000 per month have a debt-to-income ratio of 150%, while the ratio for people taking home R35 000 or more per month is 189%.

“These ratios are the highest they have been since DebtBusters began analysing debt counselling applicants’ data in 2016. Given these alarming ratios, it is no wonder that consumers feel more financially stressed,” Sager says.

DebtBusters’ annual Money Stress Tracker, one of the largest surveys about how financial stress affects other aspects of South Africans’ lives, found respondents who said they were stressed about money increased from 70% in 2022 to 78% this year, with 94% saying financial stress was affecting their home lives, 78% their work life and 77% believed it was affecting their health.

“Successive interest-rate hikes increased the burden on people servicing asset-linked debt, with the average interest rate on a bond rising from 8.3% in the fourth quarter of 2020 to 12.2% in the second quarter of this year. During the second quarter there was an increase in consumers seeking assistance to restructure asset-linked debt to legally protect assets from repossession.”

The number of consumers who successfully completed debt counselling increased more than seven-fold since 2016 and in the second quarter alone consumers who received their clearance certificates paid back over R450 million worth of debt to creditors.

Sager says the good news they picked up is the considerable increase in consumers, particularly younger consumers, taking advantage of online tools to manage debt more proactively.