Consumers are turning to unsecured credit to supplement their income as they feel the burden of increasing inflation and interest rates, compounded by the absence of meaningful increases in real income, a survey says.
DebtBusters, a debt management company that helps South Africans find financial solutions, released its Debt Index quarter 3 survey on Tuesday, which found that consumers faced a higher debt-service burden, held unsustainably high levels of unsecured debt and had far less purchasing power compared to all previous periods.
DebtBusters head Benay Sager said that even though nominal incomes were on par with 2016 levels when they factored in the cumulative inflation growth for the same six-year period, findings showed that consumers’ purchasing power shrank by 33%.
“This means consumers are taking home 33% less today in real terms than they did in 2016,” Sager said.
The data is comparable with the Reserve Bank’s private-sector credit data released last week. Private-sector credit growth surged in September, defying expectations and rising at its steepest pace in seven years as consumers battling the cost-of-living crisis tapped their credit cards and drew down their overdrafts.
Reserve Bank data shows that private-sector credit increased 9.7% year on year, topping market expectations of 8.15% and extending the growth in credit demand to the 15th straight month. The most significant contributor was assets-backed credit accounting for 50.9% of total credit. Consumer confidence is hovering at its worst level in more than 30 years and with unprecedented rolling power cuts, the data underscores the cost-of-living squeeze for consumers.
The weaker purchasing power is also compounded by higher borrowing costs, currently at 6.25%.
Unsecured debt soars
DebtBusters’ findings show that unsecured debt levels are on average 26% higher than 2016’s levels. Average unsecured loan size has grown 43% in five years while average secured loan size has grown 28%.
“This is a direct result of erosion of net income (take-home pay) forcing consumers to supplement this erosion with unsecured credit,” Sage said. “For consumers taking home R20,000 or more, the unsecured debt levels were 50% higher.”
The data shows that the debt-to-income ratio for two income bands — those earning R5,000 a month and those earning above R20,000 a month — is at its highest level recorded compared to the past.
Those earning R5,000 have a debt-to-income ratio of 87%, while those who earn more than R20,000 a month have a much higher ratio at 150%.
“More alarmingly, the debt-to-income ratio for two income bands is at its highest level compared to periods in the past,” Sager said.
Those taking home more than R20,000 had the largest increase in overall debt levels, especially compared to 2020 levels, indicating that more consumers with assets acquired during low interest rates in 2020 are seeking help with debt counselling, Sager said.
The survey also shows that, compared to a few years ago, the consumer age profile indicates increasing financial stress in the 45 years and above age group.
“While the average new applicant age has been consistent, the share of applicants who are 45 or older has increased from 19% to 25% over the past six years, indicating financial stress is becoming more prevalent in this age category,” Sage said.
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