How sky-high unemployment fuels consumer debt

Cape Town - Unemployment means no income, but that doesn’t mean no living expenses.

“We see more and more that people are going into debt to fund basics such as food”, said CEO of Debt Rescue, Neil Roets. “The sad thing is that the unemployed and the lower-income groups are the people most likely to fall into the clutches of the loan sharks, as they cannot prove to a legal lender such as a bank that they can afford to pay back the debt. Illegal lenders are often not concerned about the legal requirements of assessing a client’s ability to pay back a loan at all.”

And the lower-income group is definitely hardest hit by the debt burden: According to the IDM Debtometer (Q4), of the clients who sign up with DebtBusters, those whose monthly income is under R5 000 would need 146% of their net income to repay their existing debts. The average for all income groups is 102%.

Of the 19 million credit active consumers in SA, over half have impaired credit records, according to the South African Hunan Rights Commission.

The unemployed often make use of illegal lenders, as they don’t always qualify for loans from lending institutions, so many of them might not even be included in this statistic.

Unemployment stats in South Africa

Stats SA recently published its quarterly labour force survey, in which details are given of people who are employed, not employed or economically inactive. The stats are based on information given in the week preceding the survey.

If someone worked for as little as an hour, they are deemed to be employed. If they are capable of working or starting a business, but hadn’t done so they are considered to be unemployed. Also included in the stats are discouraged job-seekers (there is no work where they live, they cannot find a job, and have given up any hope of doing so) and the economically inactive (people who did not look for work) who are often stay-at-home parents or students.

The unemployment rate in South Africa stands at 26.7%. The actual number of unemployed people, according to Stats SA, increased from 5.2 million in the previous quarter to 5.7 million in the three months to March 2016. Employment losses were reported in utilities ( - 9.9%), manufacturing (-5.8%), construction (-5.3%) trade (-3.6%) and private households ( - 3.3%). There were job gains in agriculture ( +1.8%) and community and social services (+1.4%).

The unemployed generally do not qualify for loans from legal lending institutions, who according to the stipulations of the National Credit Act of 2005, are under an obligation to determine an applicant’s ability to repay a loan, and to make sure that the applicant understands the details of the contract (interests, costs repayment period and so forth).

There have been several cases in which lending institutions have been found guilty of not adhering to these stipulations, and in which the courts have cancelled the loan debt.

The unemployed and illegal lenders

But having a loan turned down by a legal lender doesn’t mean that a desperate consumer no longer needs the money. They are just likely to get it from illegal lenders who do not adhere to the stipulations of the National Credit Act. These are often small unsecured loans, but they accrue huge (and illegal interest rates) basically trapping the borrowers in a debt spiral from which there is no escape.

Also, in order to apply for debt counselling, a consumer needs an income, so that they have something to offer the creditors. UIF payments last only six months, so essentially, you need a job in order to sort out your debts.

With the new interest rate caps introduced for legal lenders, these institutions may no longer be that interested in giving small, unsecured loans. This could drive this portion of the market into the arms of the loan sharks

Investigations after the massacre at Marikana revealed that many miners in the area had become deeply indebted to illegal money lenders during the strike, possible fueling their demands for higher wages.

Rising food and petrol prices, interest rate hikes, and increases in electricity costs and municipal rates add to the current woes of consumers – even more so the unemployed. In 2014, the Global Findex report of the World Bank found that 86% of South Africans had taken out a loan in the preceding year – more than double the global average of 40%.

“A lack of financial literacy is a major problem in South Africa”, said Roets. “Many people simply don’t understand what they are signing, and once they fall into the debt trap, there is no escape, as they start lending more money to pay back existing loans with sky high interest rates.

Roets recommends that basic financial literacy should be a bigger feature of the SA curriculum.

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