South Africans take on more unsecured debt and repay secured credit faster

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Consumers relied heavily on unsecured loans and credit cards to make ends meet in the first quarter of the year, while paying off their secured credit faster.

The country’s credit industry continues to face new challenges in returning to pre-pandemic levels of activity, amid rising risks of stagflation and high inflation, combined with high unemployment and stagnant demand.

Findings from TransUnion’s Q1 2022 South Africa Industry Outlook report show consumers were increasingly interested in retail credit and other unsecured credit, such as credit cards and unsecured personal loans, as they had to use credit to offset property price increases due to high inflationary pressure.

At the same time, secured lending products, such as home and auto loans, experienced the opposite and saw fewer new loans and lower outstanding balances, with lower home loan values ​​and shortages of loans. procurement in the automotive industry.

Comments from lenders also suggest that some consumers considered cutting their monthly repayments by paying more than needed per month to pay off large debts amid the three interest rate hikes between November 2021 and March 2022.

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Notable increases in new unsecured credit

The report showed notable increases in new unsecured credit, but outstanding credit balances fell across all major consumer loan categories compared to the first quarter of 2021, except for unsecured non-bank personal loans. , which recorded a modest increase of 0.9%.

Outstanding balances often reflect consumer sentiment and the associated willingness to spend and these findings were corroborated by the results of TransUnion’s Q1 Consumer Pulse Study over the same period.

This study showed that almost a third of consumers (32%) have experienced a drop in household income and looking forward to the next three months, more than half (53%) said they plan to reduce their discretionary spending.

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Consumers try to reduce secured credit

On the other hand, the study indicated that for secured loans for homes and vehicles, new loans and balances declined, although the reasons for the decline in outstanding balances were different.

While outstanding unsecured loan balances often reflect current purchase activity, secured loan balances often reflect the consumer’s long-term planning due to large repayments.

The outlook suggests that consumers want to reduce their financial commitments amid rising interest rates. Due to an influx of new loans for lower value homes, the average new loan size decreased by -5.8% in the fourth quarter of 2021.

In the auto industry, consumers tend to pay off auto finance loans sooner by selling “extra” vehicles due to higher prices for quality used cars, price inflation for opportunity increased from 3.7% to 7.9%.

This recent decline in secured loan balances was also reflected in the sentiment of TransUnion’s Consumer Pulse study which indicated that nearly one in three consumers (32%) said they intended to repay its current debt faster.

“We still see a mixed picture of the recovery. The South African consumer credit market was still returning to pre-pandemic levels of activity when the shock of inflationary pressures associated with the conflict in Eastern Europe hit,” said Lee Naik, CEO of TransUnion Africa. .

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A long road to credit market recovery

He says that while some sectors of our economy, such as mining, have benefited from increased demand, overall consumer sentiment and household disposable incomes have been negatively affected.

“Based on our latest information, it is clear that the recovery in the South African consumer credit market will be prolonged and will remain volatile.”

Despite a recovery in new loan growth in a number of key categories from depressed 2020 levels, the number of consumers participating in the consumer credit market remained relatively stable and increased by only 0.3 % over the past year.

The information shows that unsecured credit growth was centered on below-premium consumers in several categories. For credit cards, 68% of total origination volumes in December 2021 were in the subprime tier and quite similar for bank personal loans (63% – up 9.4%) and non-bank personal loans ( 68% – overall static).

TransUnion expects a higher overall level for non-bank personal loans compared to bank personal loans, as this category has historically catered to the needs of high-risk consumers.

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Increase in demand for unsecured credit

“We are seeing growth in new business volumes, particularly for credit card and personal loan products. In times of uncertainty, these products are increasingly in demand as they can provide consumers with much-needed cash to fund any increases in the cost of basic necessities,” says Naik.

He warned that lenders need to be particularly aware of this trend and use advanced analytical techniques to help determine which consumers are likely to be resilient and able to continue repaying.

Lender feedback also suggests that at least some of the positive changes seen in clothing accounts (down 290 basis points), retail revolving accounts (down 50 basis points) and installment loans retail prices (down 30 basis points) were not necessarily due to improved household finances. , but rather due to concerted collection efforts by lenders.

“With global macroeconomic headwinds continuing to affect South Africa, it is important that lenders and consumers remain vigilant. Rising inflation and interest rates caused by the impact of the Ukrainian conflict and global supply shocks added additional pressure to an already tight consumer credit market that was still recovering from the effects of the COVID-19 pandemic and flooding earlier in the year.

“While we expect to see continued fluctuations in performance between product categories and consumer groups, lenders who continuously monitor their portfolio and adjust their lending strategies accordingly will be the ones that will thrive and be best positioned to meet consumer needs.”

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