Cost of living is forcing people into debt review

There has been a significant increase in applications for debt review, according to the latest debt index report from debt counselling firm DebtBusters.

The report shows that there has been a growing demand for debt counselling as consumers struggle under increasing debt repayments and higher living costs.

The figures for the first quarter of this year show that the demand for debt counselling grew by 40% when compared with the same period last year. According to the report, the average loan size for individual applicants has increased and nearly all consumers (96%) who apply for debt counselling have a personal loan.

“This indicates that consumers continue to supplement their income with unsecured credit, and personal loans have become a lifeline for many,” says Benay Sager, head of DebtBusters.

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While the size of the loans has increased, the number of credit agreements is at a historical low. There has also been a decrease in the volume of new unsecured loans. This suggests that larger loans are being granted to the same number of consumers.

Customers applying for debt review are spending an average of 65% of their net income on paying debt. Those taking home R20 000 or more per month put 70% of their income towards debt repayments. People earning less than R5 000 a month are spending 74% of their income on debt repayments before entering debt review.

This has been driven by the rising interest rates. In 2020, the average interest rate for those applying for debt review was 20.9% on unsecured credit compared with 24% this year. Interest on vehicle finance has increased from 12% to 14.8% and on mortgages from 8.3% to 11.4%.

Sager says there has been significant growth in the debt-to-income ratios, which are either at or near historically high levels. For those taking home R20 000 or more, the unsecured debt levels are 67% higher than in 2016. If one adjusts for inflation, that still represents a 27% increase in unsecured debt levels.

He says an analysis of those under debt review shows that the share of vehicle debt as a percentage of total debt has increased in the past few years.

They are also seeing an increase in the share of home loans as a percentage of total debt on new debt review applications. This is possibly due to the purchase of cars and homes when interest rates were lower in 2020.

“As interest rates started to increase in late 2021, these consumers started to feel the increasing burden of servicing asset-linked debt and more asset debt has been restructured as part of debt counselling during this period,” says Sager.

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The cost of living and below-inflation salaries appear to be a driver for increased loan activity and those applying for debt review. Compared with 2016, those customers who applied for debt counselling in the first quarter of this year had 38% less purchasing power.

Sager explains that, while nominal incomes were 2% higher than 2016 levels, when one factored in cumulative inflation growth of 40% over the same period, the net effect is purchasing power diminishing by 38%.

“When one considers that the petrol price almost doubled and the electricity price has increased by 90% over the same period, consumers definitely feel like they are taking home far less than they did before.”

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