SA consumers surviving on credit in cost-of-living crisis

Consumers are choosing to sign up for more debt as they try to increase their disposable income to afford the basics of everyday life.

Another report has confirmed that South African consumers are living on credit to survive the cost-of-living crisis.

Challenging economic conditions are causing debt balances to climb, although consumers are trying to pay off their debts sooner.

According to the latest TransUnion Q4 2022 South Africa Industry Insights Report, total outstanding balances and new account originations were higher year-over-year across most consumer lending categories as consumers tried to access greater liquidity to finance increased cost-of-living expenses.

This is happening against a backdrop of continued challenging macroeconomic conditions, with Gross Domestic Product (GDP) down 1.3% in the fourth quarter of 2022 and the Consumer Price Index (CPI) in December increasing by 7.2% over the year before.

Consumer appetite for new credit cards continued to increase towards the end of 2022, with card originations increasing by 40.1% compared to the fourth quarter of 2021, growing for the sixth consecutive quarter.

However, while lenders met this significantly higher demand, they remained cautious and offered average credit limits on new cards that were 8.8% lower than the year before. Gen Z consumers (born between 1995 and 2010) accounted for 16.7% of new card originations, an increase of 3.3% compared to 2021.

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New clothing accounts surged

The festive season and back-to-school rush boosted clothing account originations, making them surge by 59.6% compared to 2021, pushing volumes above pre-pandemic levels. However, in this case credit limits also decreased as volumes increased 9.0% compared to the year before, primarily with younger and riskier borrowers.

“This significant increase in clothing accounts also saw retailers experience a switch in payment mechanics, with credit rather than cash bookings contributing to an increased share of their growth,” says Weihan Sun, director of financial services research and consulting at TransUnion Africa.

“This is a clear sign that clothing accounts and other revolving credit facilities contribute to growth in the retail sector.”

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More personal loans

In addition, the report shows that banks were issuing more personal loans for higher value which also reflects consumers’ need for liquidity while they are living on credit. Bank personal loan growth continued, with origination volumes increasing by 4.8%, while the average new loan amount increased by 8% compared to the previous year.

Overall outstanding balances increased by 11.2% and average balances grew by 5.7%. Millennials (born between 1980 and 1994) accounted for 50% of bank personal loan originations. Non-bank personal loan volumes also increased by 24.7%, with the average new loan amount increasing by 3.8% compared to 2021.

Sun says with the continued growth momentum from the fourth quarter, new business volumes for this product are now back above pre-pandemic levels at 7.3% higher than the fourth quarter of 2019.

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More home and vehicle loans

The home loan market remains resilient despite the high interest rate environment affecting consumer affordability, with home loan originations increasing by 8.3% compared to the year before, while average new loan amounts increased by 8.4%.

Growth was driven primarily by the upper end of the market, with significant growth in sales of properties valued at R3 million and above as buyers in this segment are generally less sensitive to rate hikes, Sun says.

New vehicle loans decreased by 4.7%, although average new loan amounts increased by 7.2% compared to the year before, reflecting the combination of high interest rates and higher vehicle prices.

Sun says the current environment of rising interest rates and continued high inflation continues to contribute towards the higher cost of living for South African consumers.

“The repo rate increased six times in 2022, resulting in a 325 basis points increase on debt. Additional disruptions to macroeconomic recovery, such as the energy crisis and the war in Ukraine contributed to the continued inflationary pressure hindering debt affordability and serviceability for many consumers.”

Although consumers are signing up for more debt and living on credit, they are also trying to pay it off or at least pay on time. The report shows that overall consumer-level serious delinquency (90 days or more past due) improved by 230 basis points compared to 2021 to 38.5%.

“This improvement suggests consumers appear to be better at managing their credit repayments to preserve their continued access to the liquidity that credit products provide as they anticipate continued tough macroeconomic conditions.”

However, overall delinquency levels remained above pre-pandemic levels of 38.3% in the fourth quarter of 2019.

“Although consumers remain resilient, continued pressure fuelled by the uncertainty in the energy sector will likely be a source of discomfort for lenders, with many believing we are nearing a tipping point towards deteriorating performance,” Sun says.

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