The burden of unsecured debt: lower interest rates do not help suffocate households

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Almost half of South Africa’s 25.1 million active credit consumers are in arrears

  • South African consumers, especially middle-income households, are being strangled by their debt.
  • Debt consulting firm DebtBusters says everyone who came there was spending at least 61% of their take-home pay on debt.
  • The company claims that aggregate consumer debt levels increased towards the end of 2020 and IThe increased reliance on unsecured loans means that interest rate cuts benefit little.

South African households are failing to keep their heads above water, let alone get back into the habit of paying off their creditors as their incomes have been reduced to a fraction of what they used to be.

When the Covid-19 pandemic hit our shores, South African households that had been struggling with a drop in their take-home pay for some time turned to unsecured debt to try to top up all they had. still the chance to win – because many people have suffered pay cuts. or have lost their jobs, debt advisory firm DebtBusters said Thursday.

DebtBusters released its debt index for the fourth quarter of 2020, which showed that by 2020, household dependence on unsecured debt increased in 2020. The company said there was an increase notable in the overall level of household indebtedness towards the end of the year. And then, in January 2021, requests for debt advice the company received jumped 40% above what DebtBusters recorded in January 2020.

“The hardest hit are mostly middle-income earners, and that’s the majority of the population in South Africa when you think of the workforce,” said Benay Sager, director of DebtBusters.

Sager said consumers’ debt-to-net income ratio and their overall exposure to debt have reached unsustainable levels.

“Every person who walked through our doors had to use at least 61% of their net income to pay off their debt. their basic needs, ”Sager said.

The middle-income people Sager referred to as the most suffocating – those who earn between R5,000 and R20,000 a month – have seen both their overall debt and the portion of their income spent on debt service increase.

High-income people who earn more than R20,000 per month increased their overall debt, but still spent a lower portion of their income on repayments, as their secured debts such as home loans and vehicle finance benefited from the declines. interest rate in 2020.

The burden of unsecured debt

Sager said that, based on data from people who sought debt advice, consumer recourse to unsecured debt was on average 32% higher than when DebtBusters started compiling the index in 2016. .

Over the years, consumer dependence on unsecured lenders unrelated to banks has increased dramatically. Over the past four years, their contribution to DebtBusters managed debt through the advisory process has increased from 7% to 9%.

The problem with this increase in the use of unsecured loans lies in the significantly higher interest rates paid by consumers, which remained high at around 21% in the last quarter of 2020, despite the reduction in the take-up rate. pension of 300 basis points accumulated by SA Reserve Bank. in 2020.

“When you look at the unsecured debt in 2016, [the interest rate] was around the 25% levels. By the way, there was nothing illegal about this interest rate, ”Sager said.

“But while there has been some relief for consumers over the past year in terms of cutting interest rates, it hasn’t really benefited those with unsecured debt,” he said. -he adds.


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