Consumers relying on unsecured loans as inflation and interest rate increases bite

The full impact of successive interest rate increases since November 2021 and higher inflation rates are now evident in consumer finances, says Benay Sager, the head of DebtBusters.

DebtBusters released its latest quarterly Debt Index last week. The index is compiled from data provided by clients who have applied for debt counselling with the company.

It reported a 53% jump in debt-counselling enquiries between October and December 2022 compared to the same period in 2021. The number of those who took up the firm’s services spiked in January.

Sager said that, ironically, it was the series of interest rate reductions starting in the second quarter of 2020 that has contributed to the pressure many consumers are currently experiencing. These rate cuts resulted in associated decreases in the average interest charged for mortgage bonds and vehicle finance. The attractive rates encouraged people, particularly younger consumers, to buy vehicles and houses.

When interest rates began to rise again in late 2021, these consumers started to feel the increased burden of servicing asset-linked debt. The average interest rate for a bond went from 8.3% in the fourth quarter of 2020 to 10.8% in the fourth quarter of 2022.

News24 quoted Sager as saying that, after the festive season, consumers already in debt counselling have been asking for payment breaks, effectively asking lenders to restructure debt payments that have already been restructured.

He also said DebtBusters has seen consumers trading off and spending more money on essential items such as food at the expense of important short-term and long-term insurance products.

More debt, less purchasing power

Compared to 2016, when DebtBusters first started analysing the data, consumers who applied for debt counselling in the fourth quarter of 2022 had:

• 33% less purchasing power. Although nominal income was on par with 2016, once cumulative inflation was factored in, in real terms South Africans could buy 33% less with their money than six years ago.
• A higher debt-service burden. On average, before entering debt counselling, people spend 63% of their take-home pay to service debt. Those taking home more than R20 000 a month use 68% of their income to repay debt, and their total debt to annual net income ratio is 161%. People with take-home pay of between R10 000 and R20 000 use 63% of their income to repay debt, and their debt-to-income ratio is 124%.
• Unsustainably high levels of unsecured debt. Unsecured debt levels were, on average, 21% higher than in 2016 and 50% higher for people with take-home pay of R20 000 a month or more. This was a direct result of people using unsecured credit to counter inflation eroding their income.

Unsecured loans a lifeline

Sager said although it seemed counterintuitive, lending activity has increased as interest rates have risen because consumers supplement their income with credit, using unsecured loans as a lifeline.

The data bears this out: the average loan size increased by 31%, and 96% of consumers who applied for debt counselling in the last quarter of 2022 had a personal loan, and 20% had a payday loan.

The average size of unsecured loans increased to more than R40 000 in the third quarter of 2022 from just over R30 000 in late 2017.