Cape Town - South Africans are so deep in debt that most of them have no idea how to get out of it, forcing the most desperate to pawn their cars.
“The first step you can and should take when you find yourself drowning in debt is to contact a debt counsellor to get a free credit report and find out your options,” recommended DebtBusters CEO Ian Wason.
The debt counselling business recently launched a hard-hitting advertising campaign, which sends an alarming warning of debt being passed down from parents to their children. It urges South Africans to get their debt under control.
This is ever more crucial after South Africa's sovereign debt rating was downgraded to sub-investment grade (so-called junk status) by both Fitch and S&P Global Ratings.
The downgrades will most likely see a hike in interest rates, thus increasing the monthly cost on items like home loan and vehicle finance repayments. If the rand weakens, the price consumers will pay for imported goods will also likely increase.
However, Wason said over the course of the past five to ten years, rising food and petrol prices, a weakened rand and rising interest rates have already hit consumers’ pockets so hard that entering into a personal loan agreement has become a commonplace solution to making ends meet.
“Unfortunately, this has led to a crippling debt spiral.”
A recent World Bank index has shown that SA is one of the most indebted countries in the world.
According to the National Credit Regulator (NCR), South African consumers are R1.66 trillion in debt, owing an average of R274 000 to creditors.
A large proportion of consumers’ debt comes in the form of mortgages, vehicle repayments, clothing accounts as well as secured and unsecured credit facilities.
The NCR’s latest quarterly report shows that about 25 million people have active credit records. However, a staggering 10 million have impaired credit records.
The regulator also indicated that consumers who are over-indebted tend to miss repayments primarily because they underestimate the cost of missing payments.
“Many people tend to overlook the implications of a bad credit rating,” said Wason. He explained that not only will these people have difficulty securing a proper loan to buy a home or a car, but many employers also take credit ratings into account when it comes to finding a new job.
“It’s incredibly concerning to see how many people are desperately in debt with no idea of how to get out of it.”
DebtBusters cautions South Africans to brace for another difficult year.
“South Africans are more cash-strapped than ever before and we want to help. We want to get South Africans to take a long hard look at their finances and make better decisions," said Wason.
“Sometimes, it’s difficult to remember how we got into debt in the first place and the reality is that it feels virtually impossible to get out of it.”
Fin24 asked Wason for some tips that consumers could follow to avoid falling into the debt trap:
1. Know your status: Get a credit report.
2. Spend less than you earn.
3. Look at how much your debts are costing you and make a plan to pay off the most expensive ones first.
4. Don’t take out debt. Rather save to buy things and don’t use credit.
5. Don’t only focus on your debt; instead try reducing your expenses such as your insurance, etc.
Last month the NCR raised the alarm over the rising number of consumers who pawn their motor vehicles in order to obtain loans.
Nthupang Magolego, senior legal adviser at the NCR, said although pawning of assets for loans is allowed under the National Credit Act (NCA), the regulator cautioned against consumers pawning their motor vehicles.
She said the risk was high for consumers to lose their vehicles to pawn brokers if they are unable to repay the loans within the agreed time.
Neil Roets of Debt Rescue told Fin24 at the time that consumers pawning their vehicle means they are already experiencing financial difficulties, noting that the solution is to get rid of the debt.
The NCA introduced debt counselling, which in his view, has helped "hundreds of thousands of people" to pay off their debt in an affordable manner, without losing their assets.
"People should make use of this lifeline provided by government, instead of putting themselves even further into debt, by taking further loans on their assets that are already used as security for loans," Roets said.