Unsecured debt, or credit that is not backed by collateral, has reached “unsustainably high levels” in SA while consumers are facing rising interest rates and faster inflation that will impair their ability to service loans.
This is one of the findings made byDebtBusters, a company that helps consumers to manage debt, in its debt index survey for the fourth quarter of 2021. DebtBusters’ data shows that the average unsecured loan granted in SA has increased 45% in the last six years even as the number of borrowers taking out such loans dwindled.
“The debt levels we’re seeing among consumers who approach us for assistance, particularly unsecured debt, is unsustainable,” DebtBusters COO Benay Sager told Business Day after the release of the survey on Tuesday.
The average size of an unsecured loan in SA rose from R28,200 in the third quarter of 2016 to R40,800 in the third quarter of 2021. Over that time frame the number of unsecured loans granted fell 31% to 555,000 in the third quarter of last year, down from 803,000 in the third quarter of 2016.
“This suggests that a smaller pool of applicants who look attractive to lenders are the ones taking out more and more unsecured debt, either in the form of bigger loans or through a greater number of loans,” Sager said. “That goes back to the question of sustainability as it shows there aren’t enough new consumers entering the market that look attractive to lenders.”
With SA facing three more interest rate increases of 25 basis points in 2022, the debt counselling agency says consumers’ ability to borrow and repay debt may be significantly impaired. The Reserve Bank raised its benchmark rate for a second time in a row on January 27, taking its repo rate 25 basis points higher to 4%, as local monetary policy begins to tighten from five-decade lows.
“As the repo rate starts to tick up, the benefits of low interest rates will disappear and consumers should do everything possible to reduce the cost of credit and protect their assets,” Sager said. “Interest rates will take central stage for the foreseeable future and increases will affect our ability to borrow and pay back debt.”
While secured loans — debt granted to buy fixed assets such as vehicles — have also increased in size over the last six years, this was at a far more sedate pace. The size of the average secured loan climbed 32% to R195,000 in the third quarter of 2021, up from R147,000 in the third quarter of 2016, according to DebtBusters. Over the same time frame the number of secured loans granted fell 11% to 227,000.
One serious problem DebtBusters has identified is that consumers are increasingly turning to unsecured credit to supplement the erosion of their real income, a measure of their aftertax salaries adjusted for inflation. Consumers who approached DebtBusters for debt counselling in the fourth quarter of 2021 had 25% less take-home pay than they had in 2016 once inflation over the period had been factored in.
DebtBusters also found that indebtedness has increased across all the income bands it measures, with consumers on average requiring 62% of their take-home pay to service debt in the fourth quarter of 2021.
However, those taking home more than R20,000 a month — the top income band in DebtBusters’ analysis — have the highest total debt-to-annual-income ratio of 146%, which is likely to be due to greater exposure to mortgage and vehicle finance. Those taking home more than R20,000 a month have to use 65% to service debt, the highest monthly debt repayment ratio in DebtBusters’ analysis.
Consumers with take-home pay of R5,000 a month or less have a lower total debt-to-annual-income ratio of 81%. They require 63% of their take-home pay to service loans, which tend to incur higher interest rates as most of this credit is unsecured.
DebtBusters’ debt index for the fourth quarter of 2021 shows that unsecured loans incurred an average interest rate of 21.5%, well above the prime lending rate of 7.5%.
“On the bottom end of the income spectrum it’s almost all unsecured loans, which come with higher interest rates,” Sager said. “Again, that raises questions about sustainability.”
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