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The average consumer now has 26% more unsecured debt, such as credit card accounts, personal loans and overdraft facilities, than they did six years ago.
This is expensive debt and the high interest on it is hampering consumers, says Benay Sager, the head of debt counsellor DebtBusters.
The typical South African consumer’s total debt consists of about 25% each for vehicles and mortgages, and the rest is unsecured debt – including store cards. Almost half of this unsecured debt is personal loans with very high interest rates.
If you are a good payer, a personal loan will carry interest of 18% or 19% a year, but, for poor or infrequent payers, the interest rate can be up to 25% a year, he said.
He says that the unsecured debt of people who take home more than R20 000 a month is now 50% higher than it was six years ago.
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This is because people take on debt to try to make up for the effects of inflation on their income.
People in this income group saw their debt rise the most, especially compared with 2020. Sager says many of these consumers acquired large assets when interest rates were at historical lows in November 2020.
Many of them are now considering debt counselling because they are already struggling or will soon be stuck with repayments.
DebtBusters, the debt counsellor with the most debt under management in South Africa, says its debt index for the third quarter shows total debt levels are now on average 21% higher than in 2016.
Together with this, the index shows an increase in applications for debt counselling of more than 30% compared with a year ago.
Payments of R62 out of every R100 in debt service costs are unsustainable unless there are interventions such as debt counselling, he says.
According to Sager, it is a misconception that consumers who are already months in arrears with payments are the ones who apply for debt counselling.
READ: Poorer and deeper in debt
Most enquiries at DebtBusters are from consumers who have missed a month’s payment on some of their accounts.
Consumers usually have between six and 10 credit agreements in place, which include a home loan, vehicle finance and unsecured debt.
The debt (by value) under management at DebtBusters in the third quarter consisted of:
. 24% for vehicle financing (third quarter 2019: 22%);
. 29% for home loans (2019: 34%); and
. 47% unsecured debt (2019: 44%).
In a recent consumer survey by TransUnion, 92% of respondents indicated that access to credit and loans is important to achieving their financial goals, but consumers’ appetite for new debt or refinancing of existing credit agreements was limited.
About 33% of consumers said they would apply for new credit or refinance next year.
Although 96% of consumers believe you should keep track of the debt you incur (especially since it’s easy to shop for debt online), only 60% monitor it monthly.
According to TransUnion, 64% of consumers expect they will be able to pay their current bills and loans in full regardless of tough economic times. This shows that consumers prioritise their credit obligations.
Sager says that, for people who need help, especially to protect themselves from interest rate increases, debt counselling is an effective option that works well in South Africa.
It involves a legally binding agreement to which creditors agree. This protects the consumer’s assets (as long as they pay), which is part of the debt counselling, and which is ratified by the court.
In the third quarter of this year, six times more consumers successfully completed the debt counselling process compared with the corresponding quarter in 2016. They repaid more than R430 million to their creditors in the third quarter.
READ: Despite SA's tough economy, consumers are surprisingly optimistic
According to Sager, about 45% to 50% of people who obtain debt counselling are successful in paying off their debt, compared with only about 18% of those in debt about six years ago.
Tonia Pavlou, the deputy chief executive of the consumer finance company RCS, which offers store cards and personal loans, says experts predict that many South Africans will fall into debt on this year’s Black Friday so that they can buy what their hearts desire.
Sager says one or two years of ill-considered Black Friday purchases can plunge certain consumers into a debt trap. On the face of it, DebtBusters is now receiving more enquiries this month than it did five years ago.
Charnel Collins, the CEO of National Debt Advisors, warns against reckless spending on Black Friday and over the festive period. Collins cautions against purchases on credit because the consumer will in any case end up paying more than the “bargain price” if it was a cash transaction.
