The latest debt index from DebtBusters shows that middle-class South Africans are falling further into financial trouble as people turn to unsecured credit to supplement their paycheques.
The situation is likely to be exacerbated in the coming months as the ‘perfect storm’ of rising interest rates and growing inflation leads to more cost of living increases, the group said.
DebtBusters’ fourth-quarter enquiries show that debt counselling increased by 18% compared to a year ago. This trend intensified in the first month of 2022, with enquiries increasing by more than 32% compared to January 2021.
The Q4 2021 Debt Index found that with no increase in real income levels since 2016, South African consumers continue to supplement their earnings with unsecured credit, said Benay Sager, head of DebtBusters.
“Over the past six years the average loan size has increased by 45% and the number of debt obligations decreased by 19%. This indicates that consumers have more debt per credit agreement and are sooner reaching the point where they are no longer able to qualify for credit.”
Middle-class hit hard
While the lockdown has impacted all income groups, DebtBusters’ data shows that South Africa’s middle-class have been some of the hardest hit.
For those taking home more than R20,000 per month, the total debt to annual net income ratio is now 146%, and they need almost two-thirds (65%) of their take-home pay to service their debt repayments.
“Nominal incomes were slightly lower than 2016 levels, however when cumulative inflation growth of 24% is factored in for the same period, real incomes shrank by 25% over this period. This means consumers take home 25% less today in real terms than they did in 2016.” Sager said.
On average, consumers were spending about 62% of their take-home pay to service their debt before applying for debt counselling. Those taking home more than R20,000 or more per month need to use two-thirds of their income to repay debt.
Unsecured debt levels were on average 22% higher than in 2016. For consumers taking home R20,000 or more per month, unsecured debt levels were 43% higher. This indicates that these consumers are using unsecured credit to supplement the erosion in their real income, Sager said.
“Alarmingly the debt-to-income ratio for the top two income bands was higher in Q4 2021 compared to the same periods in the past. For people taking home more than R20,000 per month, the debt-to-income ratio was 146%.”
A perfect storm
Sager said that consumers are now facing a ‘perfect storm’ of rising interest rates and growing inflation.
“Average interest rates for bonds and vehicle finance started to decrease from the second quarter in 2020, thanks to the Reserve Bank’s multiple rate reductions.
“Consumers with assets benefitted from this as well as the bank payment holidays introduced to mitigate the impact of the Covid-19 pandemic. Bank payment holidays ended a while ago; now 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.”
Households are getting poorer, too. The latest take-home pay data from clearinghouse BankservAfrica shows that the average take-home pay in the country was R15,542 in December 2021. While this is up 7.1% from November 2021, in real terms, the value is down 5.2% from December 2020.
As disposable income stagnates, the cost of living is climbing ever higher: a petrol price hike of 53 cents per litre hitting is in February; electricity price hikes upwards of 20.5% are on the cards for the next year; and food prices are projected to increase even more in 2022.
Despite rising interest rates, declining real income and increasing debt levels, there are some positive signs, Sager said.
“We’ve found that following the lockdowns, the end of the 2020 payment holidays and a diminished ability to borrow, more consumers are proactively seeking help to manage their debt.
“Another positive indicator is that 55% of new applicants are male. In a society where men often avoid talking about debt or fear being stigmatised, this is good news. After all, if you’re struggling with debt, getting help is the responsible thing to do.”