SA’s debt burden grows as household incomes decline

The debt burden on South African consumers continues to grow while their income declines. While payment holidays and successive repo rate reductions had provided significant relief for South Africans last year, the respite has been short-lived for consumers who rely on unsecured debt.

The DebtBusters Q4 2020 Debt Index also found that real incomes had shrunk across all income bands, in some cases by up to 20% compared to 2016 levels. The income reduction was temporarily balanced by payment holidays and interest rate cuts to reduce repayments on homes and cars, but interest rates for unsecured debt were still around 21%.

Most South African consumers have unsecured debt and they were faced with a debt burden when payments kicked in again, as can be seen in the share of unsecured debt in the portfolio of consumers who applied for debt counselling.

According to the report, the share of unsecured debt for debt counselling applicants was always under 50%, but this figure spiked to 60% in the third quarter of 2020, before dropping to 51% in the fourth quarter after payment holidays ended late in the third quarter of 2020.

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Other findings

The 2020 Debt Index for the fourth quarter also found that:

• Income is declining in real terms and consumers are using unsecured debt to make up the shortfall now that their income is 2% lower. Add to this cumulative inflation of 18% and it becomes clear that real income has shrunk by 20% over the four years.
• Unsecured debt is, on average, 32% higher than it was in 2016 across all income bands. If you earn R20,000 or more, unsecured debt levels are about 45% higher when higher earners, with greater access to unsecured debt, use this to offset the erosion of their net income.
• People taking home over R20,000 per month spend 60% of their monthly net income to repay debt. Their total debt-to-income ratio is the highest it has been in years at 130%.

Impact of lockdown

The impact of the lockdown to prevent the spread of Covid-19 has resulted in households, which were just making ends meet, now struggling to pay their bills, Benay Sager, head of DebtBusters, says.

“Lower interest rates and payment holidays may have provided some short-term relief, but the economic slowdown, business closures, redundancies, salary cuts, reduced or no year-end bonuses and the steady erosion of real net income considerably outweighs this.”

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Getting assistance

Enquiries about getting assistance with debt are up by 40%, compared to the same period in the previous year.

“South Africa has an effective, well-regulated, world-class debt counselling sector and points to the 40% per annum increase over the past four years of people successfully completing the process.”

In January this year, DebtBusters provided clearance certificates to clients who had combined debt of R142 million.

Interest rate reductions

The last year’s interest rate reductions have benefitted people who also successfully applied for debt counselling. Debt counsellors could negotiate reductions of over 90% on interest rates for unsecured debt, from an average of 21% to 1.2%. Such a reduction in interest rates provides substantial savings for consumers, which is a big benefit of debt counselling, Sager says.

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Men are also getting help with debt

He points out that more men are becoming proactive about their debt, with 55% of new applicants being men in the fourth quarter.

“In a society where men often avoid talking about debt, are too embarrassed to ask for help or fear being stigmatised, this is good news. After all, if you’re struggling with debt, getting help is the responsible thing to do.”

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