Individuals earning more than R35,000 a month are bearing the brunt of diminishing disposable incomes, with many drowning in debt.
This is revealed in the first-quarter DebtBusters debt index, which found that a combination of high interest rates and inflation, as well as stagnant salaries due to lack of economic growth, are eroding consumers’ disposable income.
The index by the debt-counselling company shows demand for debt counselling has shot up 22% as more consumers struggle to keep up with loan repayments and putting bread on the table at the same time.
The data shows that consumers’ purchasing power declined 47% between the first quarter of 2016 and first three months of this year, while the debt-service burden surged in the period, with the average debt-counselling applicant using 62% of net income to repay debt.
Higher income workers are particularly squeezed, with the debt-to-income ratio for people taking home more than R20,000 a month coming in at 127%, and worsens to 172% for those earning R35,000 or more, with most of the debt being home and car finance.
Benay Sager, executive head of DebtBusters, said top earners had unsustainably high levels of unsecured debt, with unsecured debt for those earning more than R35,000 41% higher than it was in 2016.
Sager said this suggested that salaries had been stagnant and that without meaningful salary increases, consumers were using debt to supplement their income.
“The average interest rate for unsecured debt is now at an eight-year high of 25.7% per annum. What also continues to be apparent is how higher-income earners are using credit to offset the dual impact of inflation and interest rates — now 475 basis points higher than in 2020,” Sager said.
“These consumers typically have more short-term loans than those in other income bands and devote a greater proportion of their income to repaying debt.”
SA’s biggest four banks have about R98bn in underperforming home loans, reflecting the effect of high interest rates on consumers, according to data from the country’s largest lender, Standard Bank.
Standard Bank said the surge in interest rates since November 2021 had put pressure on consumers, especially in repaying variable instalment loans such as mortgages and vehicle asset finance.
The prime lending rate has risen 475 basis points (bps) since November 2021 to 11.75%, which is 200bps higher than a few months before the Covid-19 crisis hit.
Standard Bank also saw increased activity from debt counsellors, encouraging customers to enter debt review. The debt portfolio at the industry level now sits at more than R80bn.
Gerrie Fourie, CEO of Capitec, SA’s largest bank by customer numbers, cautioned last month against the trend of debt counsellors placing consumers under debt review when their financial position did not warrant it. He said that while debt review had a place, there was a worrying trend of the mechanism being used against the interests of clients.
Debt review is meant to help customers who are struggling to meet their debt obligations. A debt counsellor approaches creditors and makes arrangements on a client’s behalf, reducing payments to a manageable monthly amount.
The process typically spans three to five years, during which time a consumer cannot access the credit market. Banks and other lenders cannot take legal debt enforcement action against a consumer who is under debt counselling.
Sager said the growth in debt counselling inquiries and use of online debt management tools was positive as it indicated more consumers were trying to become financially sustainable
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