Cash-strapped consumers turn to debt counselling as payment holidays end

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here's been a surge in the number of consumers who approached debt counselling firm, DebtBusters in the first quarter of 2021.
here's been a surge in the number of consumers who approached debt counselling firm, DebtBusters in the first quarter of 2021.
  • There's been a surge in the number of consumers who approached debt counselling firm DebtBusters in the first quarter of 2021.
  • As banks' payment holidays came to an end, consumers started turning to debt counselling.
  • Debt levels of high-income earners are consistently rising, and low-income earners spend three-quarters of their net income servicing debt.

More consumers have started to seek the help of debt counsellors this year as bank payment holidays - some of which have extended for most of 2020 to accommodate those who still couldn't pay - came to an end.

DebtBusters, one of South Africa's largest debt counselling companies, said the number of consumers who made enquiries in the first three months of 2021 grew by 31% compared to the same period in 2020.

However, not all people who make enquiries sign up for the process. Some don't qualify as debt counselling requires individuals to still have a consistent income to sign up, even if it has been reduced.

"Many consumers are seeking help proactively as bank payment holidays from 2020 came to an end, and their ability to borrow has narrowed," wrote DebtBusters in its Debt Index for the first quarter of 2021.

The first three months of 2020 were largely a normal period as the lockdown only began a few days before the end of March. In the first months of the lockdown, DebtBusters saw debt counselling inquiries shoot up 80% in April and May of 2020, even though banks had quickly rolled out payment holidays and other Covid-19 relief initiatives to most of their customers who needed it.

To qualify for banks' relief initiatives, customers had to be in good standing. And because of this, DebtBusters has seen inquiries increase since the lockdown began.

On Tuesday, DebtBusters CEO Benay Sager said while people have become more indebted over the past five years, the company also observed that more people are becoming more proactive about debt management because of a lack of increase in real incomes.

"Although nominal income is 7% higher compared to 2016 levels, when cumulative inflation of 24% is factored in, real incomes have shrunk by 17% in five years. Many consumers are compelled to borrow to make up the shortfall," said Sager.

Because of this borrowing to plug the gap between households' incomes and their rising living expenses, people are spending more of their take-home pay servicing debt each month, creating a vicious cycle that's trapping them in debt.

Using data of consumers who've approached it, DebtBusters observed that people with a take-home pay of more than R20 000 per month were spending over 60% of their monthly net income to service debt. Their debt-to-income ratio stood above 130%.

Low-income consumers – those taking home less than R5 000 a month – had the lowest debt levels at 74% debt-to-income ratio. However, they also spend 74% of their net income to service debt every month, leaving them with just a quarter of what they earned to cover living expenses.

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