Big loans, rising interest and shrinking income – the cocktail fuelling loan default fears

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DebtBusters says interest rates might not need even to reach 2019 levels before many consumers start to battle with their monthly instalments.
DebtBusters says interest rates might not need even to reach 2019 levels before many consumers start to battle with their monthly instalments.
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  • DebtBusters has released its Debt Index for the fourth quarter of 2020.
  • People approaching it for debt counselling were already spending almost two-thirds of their net income on debt repayments in 2021.
  • The company recorded a 32% increase in people applying for debt counselling this January.

Interest rates might not need even to reach 2019 levels before many consumers start to battle with their monthly instalments, says debt counselling firm DebtBusters.

The company, which presented a five-year trend on consumer debt in SA on Tuesday, said it has already started seeing the impact of the rising interest rates among consumers who've approached it for debt counselling. 

"We can already see the impact because what happened was consumers adapted to the new way, expanded their spending and their borrowing. So, I don't think we need to wait for the interest rates to get to where they were a few years ago to see the impact," said DebtBusters COO Benay Sager.

The SA Reserve Bank began increasing the interest rates in the country in November 2021 after five successive cuts in 2020. 

For one-and-a-half years, consumers became used to the record-low cost of servicing their debts. Many took advantage of that and bought homes, cars and other assets. Data from the National Credit Regulator showed that SA consumers collectively owed R2.08 trillion at the end of September 2021, and they accumulated R150 billion of that from the last quarter of 2019.

After the first 25 basis points hike in November, DebtBusters recorded an 18% increase in the number of people making inquiries about debt counselling in the fourth quarter of 2021. This January, the number of people knocking at its doors has increased by 32% compared to January last year.

DebtBusters has not sifted its data to the point where it can tell how many of those are battling to service the debt they took out in 2020 or 2021. But it will start looking at that soon. 

But before the last two interest rate hikes, people applying for debt counselling were already spending around 62% of their take-home pay on repayments. Those taking home more than R20 000 a month used two-thirds of their income towards debt repayments.

Bigger loan sizes and spiralling unsecured debt

From the third quarter of 2016, the prime lending rate was 10.5%, and it stayed around 10% for the most part until January 2020. Consumers who approached DebtBusters then were paying around 11% interest on average on their home loans and about 14% for their cars. 

Loan sizes were smaller in those years than they are now. Their repayments were lower; yet, people were already turning to the debt counselling firm for help at those interest rates.

Now, the average size of a secured loan has grown by 32% between the third quarter of 2016 and the third quarter of 2021. First-time homebuyers in 2021 were buying for R1 million on average, whereas they spent under R900 000 on a home in 2019.

The average size of unsecured loans has grown even more rapidly at 45%. The use of unsecured debt products like credit cards, store accounts and overdrafts was 22% higher than 2016 on average but 43% higher for top earners.

Some people have started using these credit lines to honour their other debt obligations – a case of borrowing from Peter to pay Paul.

"Consumers are essentially borrowing more to sustain their debt obligations but also their expenses," said Sager.

As larger loan sizes mean higher repayments, consumers turn to debt counselling much faster than they used to before. Back in 2013 and 2014, indebted consumers turned to DebtBusters when they had around nine credit agreements.

"Now it's around six. What this means is consumers have more debt per credit agreement," said Sager.

Declining incomes

Stagnant incomes are partly to blame for people turning to unsecured debt to pay their other creditors or their living expenses once debt repayments leave them dry.

People who applied to DebtBusters in 2021 took home 1% less in net income than in 2016 on average. Those netting more than R20 000 took home 5% less. Over that same period, inflation increased by 24%. So, on average, those approaching the debt counselling firm had 25% less purchasing power than they did five years ago.

"Even though inflation is reported to be between 5% and 6%, in reality, what consumers are feeling, particularly with electricity and municipal increases, is far higher than that," said Sager.

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