South Africans relying on payday loans to make ends meet

SOUTH African consumers continue to use loans to make ends meet as inflation’s cumulative effect together with persistently high interest rates erode their income, despite the fact that inflationary pressure somewhat was subsiding.

The Debt Busters Debt Index for the second quarter of 2024 index showed that some 82% of people who applied for debt counselling during the quarter had a personal loan. A further 53% had one-month loans. These payday loans have become a lifeline for many households, but are very expensive with interest rates often in excess of 25% per annum, DebtBusters said.

Benay Sager, executive head of DebtBusters, explained that when the interest rate increases began, people started to feel the increasing pressure of servicing asset-linked debt. He said the average interest rate for a bond went from 8.3% per annum in the last quarter of 2020 to 12.3% in the second quarter of this year. “More alarmingly, the average interest rate for unsecured debt is now at an eight-year high of 26% per annum,” Sager said.

The debt-management company said inflation had eased but remained at the upper end of the central bank’s range and continued to constrain consumer finances. “Since 2016 electricity tariffs have increased by 2.35 times, the petrol price has doubled, and the compounded impact of inflation is 46%–- all three indicators putting additional pressure on South Africans.”

It added that while there were indications that the interest rates may finally start to tick down, they had been consistently high for over a year. Although consumers were said to be better able to deal with elevated but stable interest rates, they were still feeling the impact of the successive rate increases that started in November, 2021.

Sager said it was not all bad news. He said the median debt-to-annual-income ratio was stable and has been low for the past four quarters. While still high at 105%, it was much lower than levels seen in the past few years, he added.

“We welcome this, as well as the fact that debt counselling enquiries are up by 18% and registrations for online debt-management tools have increased. It indicates more people are taking action to deal with debt,” Sager said.

The Q2 2024 Debt Index found that compared to the same period in 2016, people who applied for debt counselling had significantly less purchasing power. Since 2016 nominal income had increased marginally by 2% but the cumulative impact of inflation is 46%. This meant that today’s pay packet buys 44% less than eight years ago.

The index also found that these applicants had a high debt-service burden as on average, these consumers need 62% of their take-home pay to service debt. Those earning R35,000 or more a month spend 68% on debt repayment. Debt-to-income ratios for top earners were said to be at or near the highest-ever levels. For people taking home more than R20,000 a month the ratio was 128%, and for those earning R35,000 or more it was 167%.

The applicants were also said to have high levels of unsecured debt if they were top earners as on average, unsecured debt levels were 12% higher than in 2016. However, this was lower than in recent quarters and was a positive trend. For those taking home R35,000 or more, unsecured debt levels were 38% higher than eight years ago. While this was said to be on par with inflation, in the absence of meaningful salary increases, it indicated consumers need to supplement their income with unsecured debt.

Sager said debt counselling was a proved and effective way to help people struggling with debt. The number of people completing debt counselling has increased 10 times since 2016. In the second quarter of this year alone, consumers who received their clearance certificates were said to have paid back more than R640 million to creditors.

He said the fact that more people are taking proactive steps to keep their debt under control is good news. Consumers registering for DebtBusters’ online self-help tools such as Debt Radar and the Debt Sustainability Indicator increased by 12% compared to the same period the previous year.

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