South Africans taking on more unsecured debt, paying off secured credit faster

Consumers have relied heavily on unsecured loans and credit cards to make ends meet during the first quarter of the year, while also paying off their secured credit faster.

The country’s credit industry continues to face new challenges in the return to pre-pandemic levels of activity, against a background of rising stagflation risks and high inflation, combined with high unemployment and stagnant demand.

The findings of TransUnion’s Q1 2022 South Africa Industry Insights Report shows that consumers were increasingly interested in retail and other unsecured credit, such as credit cards and unsecured personal loans, as they have had to use credit to make up for price increases on goods due to high inflationary pressure.

At the same time, secured lending products, such as home and vehicle finance loans, experienced the reverse and recorded fewer new loans and smaller outstanding balances, with smaller home loan values and supply shortages in the auto industry.

Lender feedback also suggests some consumers considered reducing their monthly repayments by paying more than required per month to pay off their big debts against a backdrop of the three interest rate increases between November 2021 and March 2022.

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Notable increases in new unsecured credit

The report showed notable increases in new unsecured credit, but outstanding credit balances declined across all major consumer lending categories compared to the first quarter of 2021, except for non-bank unsecured personal loans, which recorded a modest increase of 0.9%.

Outstanding balances often reflect consumer sentiment and related willingness to spend and these findings were further supported by the results of TransUnion’s Q1 Consumer Pulse Study during the same period.

This study showed that almost a third of consumers (32%) experienced a decrease in household income and looking forward to the next three months, more than half (53%) said they plan to decrease discretionary spending.

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Consumers try to reduce secured credit

On the other hand, the study indicated that for secured loans for homes and vehicles, new credit and balances decreased, although the reasons for the declining outstanding balances were different.

While outstanding balances for unsecured loans are often a reflection of current buying activity, balances for secured loans often reflect the consumer’s long-term planning due to significant repayments.

Insights suggest consumers want to reduce their financial commitments against a backdrop of rising interest rates. Due to an influx of new loans for lower value homes, the new average loan amount decreased by -5.8% in the fourth quarter of 2021.

In the auto industry the trend is for consumers to pay off vehicle finance loans earlier by selling ‘extra’ vehicles due to rising prices of quality second hand cars, as used vehicle price inflation increased from 3.7% to 7.9%.

This recent decrease in secured lending balances was also reflected in the sentiment of TransUnion’s Consumer Pulse Study that indicated almost one in three (32%) consumers said they intended to pay off current debt faster.

“We are still seeing a mixed picture of recovery. The South African consumer credit market was still trending back to pre-pandemic levels of activity when the shock of inflationary pressures associated with the conflict in Eastern Europe hit,” Lee Naik, CEO of TransUnion Africa, says.

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Long way to credit market recovery

He says although some sectors of our economy, such as mining, benefited from increased demand, overall consumer sentiment and household disposable incomes were affected negatively.

“Based on our latest insights, it is clear that the South African consumer credit market recovery will be elongated and remain volatile.”

Despite a recovery in new loan growth in a number of key categories compared to depressed 2020 levels, the number of consumers participating in the consumer credit market remained relatively flat and increased by only 0.3% over the past year.

Insights show that growth in unsecured credit was centred on below prime consumers across multiple categories. For credit cards, 68% of total origination volumes during December 2021 were in the subprime tier and quite similar for bank personal loans (63% – up 9.4%) and non-bank personal loans (68% – broadly static).

TransUnion expects a higher overall level for non-bank personal loans compared to bank personal loans, as this category historically catered for the needs of higher-risk consumers.

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Increased demand for unsecured credit

“We are seeing growth in new business volumes – particularly for credit card and personal loan products. During times of uncertainty, these products are increasingly in demand as they can provide consumers with much needed liquidity to finance any increase in the cost for everyday essentials,” Naik says.

He warned that lenders need to be particularly aware of this trend and use advanced analytical techniques to help determine which consumers are likely to be resilient and be able to continue to repay.

Lender feedback also suggests that at least some of the positive change seen in clothing accounts (down 290 basis points), retail revolving accounts (down 50 basis points) and retail instalment loans (down 30 basis points) was not necessarily due to improved household finances, but rather because of concerted collection efforts by lenders.

 “With continued global macroeconomic headwinds impacting South Africa, it is important that lenders and consumers remain vigilant. Rising inflation and interest rates caused by the impact of the Ukrainian conflict and global supply shocks have added additional pressure to an already stretched consumer credit market that was still recovering from the impacts of the COVID-19 pandemic and floods earlier in the year.

“Although we expect to see continued fluctuations in performance across product categories and consumer groups, lenders that continuously monitor their portfolio and adjust their lending strategies accordingly will be the ones that prosper and be best placed to serve consumer needs.”