With the rising interest rates and high inflation, many more South Africans are seeking help to manage their increasing debt burden, with demand for debt counselling growing by 40% compared to the same period in 2022.
According to DebtBusters, the Debt Index shows that when compared to the first quarter of 2016, consumers who applied for debt counselling in the first quarter of 2023 had 38% less purchasing power, as well as unsustainably high levels of unsecured debt and a higher debt-service burden – with an average 65% of net income being used to service debt.
Benay Sager, head of DebtBusters, said despite the dual impact of interest rates and inflation on the latest data, one of the positive indicators is the massive 92% increase in younger consumers subscribing to online debt management tools to manage their debt more proactively.
Sager said he expects the trend to continue for the rest of the year as the full impact of successive interest-rate increases since November 2021 and elevated levels of inflation are now fully evident in consumer finances.
“As interest rates have risen, credit has become burdensome for many consumers. Average bond interest rates increased from 8.3% to 11.4% per annum in a short space of time. Average vehicle finance rates rose from 12% to 14.8% during the same period.
"This means if you have a R1m bond and owe R200,000 in vehicle finance, you are expected to pay nearly R5,000 more per month. This steep increase is pushing consumers to tap into more personal loans. Nearly everyone, 96% of people who applied for debt counselling, had a personal loan. This indicates consumers are supplementing their income using unsecured credit and personal loans have become a lifeline for many South Africans.”
When compared to Q1 2016, the Debt Index shows that consumers who applied for debt counselling in the first quarter of 2023 had a higher debt-service burden, with 65% of net income used to service debt: Before applying for debt counselling, on average, consumers were spending 65% of their take-home pay to service debt. Those taking home R20,000 a month or more needed 70% of their income to make debt repayments.
The study showed that there was unsustainably high levels of unsecured debt which had increased by 30% since 2016.
Sager said for consumers needing help with debt, debt counselling is an effective process which can extend the time consumers have to pay off unsecured debt, allowing them breathing room on their monthly finances.
The pros of debt counselling
• When you are in debt counselling, you will no longer receive calls from your creditors demanding payment and they cannot take any action against you;
• Your debt is consolidated into a single and reduced monthly repayment, giving you peace of mind;
• Your budget will be tailored according to your basic needs before provision is made for debts;
• There is no permanent record of having undergone debt counselling.
The cons of debt counselling
• Debt review costs money but the fees are regulated;
• You are not allowed to take out new credit while undergoing debt counselling; and
• Your debts might take longer to settle because you pay smaller amounts.
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