Large loans, rising interest and falling income – the cocktail fueling default fears

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DebtBusters says interest rates may not even need to reach 2019 levels before many consumers start to struggle with their monthly payments.

  • DebtBusters has released its Debt Index for the fourth quarter of 2020.
  • People approaching him for debt advice were already spending nearly two-thirds of their net income on debt repayments in 2021.
  • The company saw a 32% increase in the number of people seeking debt advice in January.

Interest rates may not even need to reach 2019 levels before many consumers start to struggle with their monthly payments, says debt advisory firm DebtBusters.

The company, which presented a five-year trend in consumer debt in South Africa on Tuesday, said it had already started to see the impact of rising interest rates in consumers who took it. approached for debt advice.

“We can already see the impact because what’s happened is consumers have adapted to the new way of doing things, increased their spending and increased borrowing. So I don’t think we’ve need to wait for interest rates to get to where they were a few years ago to see the impact,” said Benay Sager, COO of DebtBusters.

The SA Reserve Bank began raising interest rates in the country in November 2021 after five successive cuts in 2020.

For a year and a half, consumers have become accustomed to the record cost of servicing their debts. Many took advantage of this and bought houses, cars and other goods. Data from the National Credit Regulator showed that South African consumers collectively owed R2.08 trillion at the end of September 2021, and they have accrued R150 billion since the last quarter of 2019.

After the first 25 basis point rise in November, DebtBusters saw an 18% increase in people inquiring about debt advice in Q4 2021. In January, the number of people knocking on its doors increased by 32% compared to January of last year.

DebtBusters hasn’t sifted through its data to the point of being able to say how many of them are struggling to pay off the debt they took on in 2020 or 2021. But it will soon start paying attention.

But before the last two interest rate hikes, people seeking debt advice were already spending around 62% of their take-home pay on repayments. Those who brought home more than 20,000 rand a month used two-thirds of their income to pay off their debts.

Larger loans and spiraling unsecured debt

Starting in the third quarter of 2016, the prime rate was 10.5%, and it remained around 10% for the most part until January 2020. Consumers who contacted DebtBusters were then paying around 11% interest in average on their home loans and around 14% for their cars.

Loan sizes were smaller then than they are now. Their repayments were lower; yet, people were already turning to the debt counseling firm for help with these interest rates.

Today, the average size of a secured loan has increased by 32% between the third quarter of 2016 and the third quarter of 2021. First-time buyers in 2021 bought an average of R1 million, while they spent less than R900,000 on a house. in 2019.

The average size of unsecured loans grew even faster at 45%. The use of unsecured debt products like credit cards, store accounts and overdrafts was on average 22% higher than in 2016, but 43% higher for high earners.

Some people have started using these lines of credit to pay off their other debts – a case of borrowing from Peter to pay Paul.

“Consumers are essentially borrowing more to meet their debts but also to meet their expenses,” Sager said.

As larger loans mean higher repayments, consumers are turning to debt advice much faster than before. In 2013 and 2014, consumers in debt turned to DebtBusters when they had about nine credit agreements.

“Now it’s around six. That means consumers have more debt per credit agreement,” Sager said.

Lower income

Stagnating incomes are partly to blame for people turning to unsecured debt to pay other creditors or living expenses once debt repayment leaves them broke.

People who applied to DebtBusters in 2021 earned 1% less net income than in 2016 on average. Those earning more than R20,000 won 5% less. During the same period, inflation increased by 24%. So, on average, those who came to the debt advice firm had 25% less purchasing power than five years ago.

“Even if inflation would be between 5% and 6%, in reality what consumers are feeling, especially with electricity and municipal increases, is much higher than that,” Sager said.

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