There has been a more than 30% increase in debt counselling inquiries compared to the same period a year ago, indicating the financial stress consumers are experiencing.
This is according to DebtBusters’ Q3 2022 Debt Index.
More than 1 400 debt review companies in South Africa are registered with the National Credit Regulator.
Petrol prices hiked by 59 cents a litre for December on Tuesday, adding to the rise in prices of food and energy costs have led to the runaway cost of living, while salaries remain muted in a slumping economy.
Benay Sager, the chief operations officer at DebtBusters, said the rise in inquiries for debt counselling is attributable to first-time home and car buyers, who are struggling with debt-serving costs.
“An increasing number of inquiries are from consumers who were first-time buyers of assets while interest rates were at historical lows before November 2021,” he said. “Inflation is making life quite difficult for a lot of our consumers and then the interest rates, which is a bigger difficulty.”
This affects the cost of borrowing, to 7%, higher than its level before the Covid-19 pandemic.
Speaking after the rate announcement, Reserve Bank governor Lesetja Kganyago said: “South Africans are complaining about the rising cost of living. And it is important that the central bank continues to deploy its instruments to tame the monster of inflation.”
Sager said consumers who are in the market for a house or a car need to understand how much extra they would need to pay if interest rates went up by, for example, 100 percentage points.
“People should do this at the beginning before they sign on the dotted line. I would really like consumers to think about this and if the answer is that they will be able to pay for that car or bond if the interest rate went up by 1%, then that’s great and if the answer is no I would say they need to find a better deal,” Sager said.
Sager said to fully understand how interest rates have affected home buyers in the past two years the real comparison should be made with 2020 third quarter repo rate, which was at an all time low of 3.5% (prime at 7%) to today where repo rate is 7% (prime at 10.5%).
“That means if you had a prime plus 1% bond interest rate in Q3 2020 your interest rate would have been 8%. Today, the same interest rate is 11.5%.
“For a R600 000 bond in 2020 the monthly repayment would have been R5 019 but in 2022, that same bond’s monthly repayment is R6 399.
“Another illustration is that for a R1 million bond in 2020 the monthly bond repayment would have been R8 364 and today that same bond costs R10 664 a month.”
The Mail & Guardian recently reported that with the rise in interest rates the residential housing market is not as buoyant as it was when interest rates were at historic lows.
According to the Momentum/Unisa South African Household Wealth Index for the third quarter of 2022, the value of households’ outstanding liability increased by an estimated R47.9 billion to R2.716 trillion. The surge was driven by residential mortgages and other liabilities.
Mortgages comprised about 46.2% of household liabilities during the period.
“A lot of our young people, who would have been first time homeowners or first time vehicle purchasers when interest rates were lower, are now paying substantially more. That R600 000 bond and financed vehicle for R200 000 means that you are looking at somewhere between R4 000 to R5 000 extra that you need to come up with. And who has that kind of money?” Sager said.
DebtBusters first began collating and analysing data for the Debt Index in 2016. A quarter-on-quarter comparison with Q3 2016 starkly shows how inflation has eroded income and rising interest rates are adding to debt-service cost, the debt index read.
According to Statistics South Africa, consumer price inflation rose to 7.6% year-on-year in October, up from 7.5% the previous month. This is still breaching the Reserve Bank’s upper limit of 6%.
“The impact of the twin ‘I’s — inflation and interest — is evident in the data, which shows consumers are using unsecured credit to supplement their income. Average loan sizes have increased by 43% in just six years,” Sager said in a note.
He added that debt repayment is usually the largest line item on a person’s take-home pay and the more debt accumulates, the harder it is to rein it in.
“If that number [the money allocated to debt repayment] is more than 30%, you should really talk to someone about reducing that debt.
“If it’s more than 40% you need to talk to someone, like, right now, because we know from experience that it’s not generally sustainable when that number is more than 40%.
“People may be able to do it for a while but 30% is kind of like our soft limit, so to speak, but 40% is definitely the upper limit. Most of the consumers we speak to who end up signing up to the counselling would have a much higher number than that,” Sager said.
Neil Roets, the chief executive of Debt Rescue, said their company is also seeing increased inquiries for debt counselling “and we are attributing it to both the rising cost of living and the interest rates increases which have had a big impact on consumers”.
“People are looking at what options are available to them and in terms of what they can and should do in terms of lifestyle changes. Can they make lifestyle changes or is it a case that they’re over indebted and need to seek help now and this is why we are seeing increased inquiries,” he said.
How to seek debt counselling
Benay Sager, of DebtBusters, said once someone has made up their mind that they want to speak to a debt counsellor about improving their situation they need to look for reputable companies.
“One of the things to guard against is verifying who you are talking to. You can find whether someone is registered on the NCR’s [National Credit Regulator’s] website and you can search for the counsellor’s name. Just like you would verify if you are buying insurance that you are speaking to the entity they present themselves to be.”
He advised that the consumer seeking debt counselling needs to be comfortable having a tough conversation with someone about their spending habits and how much they earn.
“I think sometimes consumers tell lenders and banks what those entities wish to hear as opposed to what really happens. And I think we must be honest with ourselves as consumers on what you spend money on and whether you are able to make ends meet,” Sager said.
Neil Roets, of Debt Rescue, said debt counselling is voluntary.
“It’s very much a situation where they’ve established that they are over indebted, they seek help and we help them. We help them budget, we look at their required living expenses, what their debt load is and so forth.”
He said consumers need to pick a debt counsellor who has been in the game for a while. “Do your homework, don’t just go with anybody.”
Roets said there is no predetermined period of how long the debt counselling process lasts.
“It depends on their debt burden and on whether there are assets involved such as houses and cars and it depends on what they can afford to repay. The whole idea is that the more you can repay the faster you can rehabilitate yourself and get out of debt review.”
Being under debt review means the consumer is protected from creditors, who will be informed, along with the credit bureaus, that the person is under debt review.