Cost of living crisis pushes cash-strapped consumers deeper into debt trap

The DebtBusters’ Q4 2023 Debt Index shows that the average interest rate for a home loan climbed from 8.3% a year in the fourth quarter of 2020 to 12.3% three years later (Q4 2023). Average interest rates for unsecured debt are now at an eight-year high of 25.6%.

Against this backdrop, debt counselling enquiries increased by 46% and demand for online debt management was up 54% compared to the same period the previous year. Full-year debt counselling enquiries grew by 39% compared to 2022, pointing to an acceleration in the final quarter of 2023.

Read more in Daily Maverick: Cost of living in SA reaches critical highs for rich and poor alike

Benay Sager, executive head of DebtBusters, says that while the combination of high inflation, interest rates and poor economic performance had negatively impacted disposable income, the fact that more people are seeking help to manage debt is positive.

“The increasing use of online debt-management tools indicates consumers are being more proactive about debt — before it gets out of control. The data also points to more people considering debt counselling as an effective way to deal with debt in a high-interest environment”.

Sager says under debt counselling, rates for unsecured debt can be renegotiated from 25.6% to approximately 2.6%. This allows consumers to pay back expensive debt quicker. Interest on vehicle debt and balloon payments, which average 15.6%, can also be negotiated down to just under 10% with the repayment periods extended.

The Debt Index also shows that 96% of those who applied for debt counselling in the fourth quarter of last year had a personal loan, highlighting that unsecured credit has become a lifeline for many since the pandemic.

Compared to 2016, when DebtBusters began collecting and analysing the data, consumers who applied for debt counselling in the fourth quarter of 2023 had:

• Thirty-nine per cent less purchasing power: Although nominal incomes were 1% higher than seven years ago, when cumulative inflation of 40% is considered, in real terms spending power is down 39%.


• A higher debt-service burden: On average, before entering debt counselling, consumers spend 62% of their take-home pay to service debt. Those making R35,000 or more per month use 71% of their income to repay debts. The debt-to-income ratio for the top income bands is 131% for those earning R20,000 per month and 171% for people taking home R35,000 or more. For these income bands, the ratios are at or close to the highest-ever levels.


• Unsustainably high levels of unsecured debt: Unsecured debt is, on average, 32% higher than in 2016. For those taking home more than R35,000 a month, it is 42% higher. Although this is par with inflation, it shows that in the absence of meaningful salary increases, consumers are supplementing their income with unsecured debt.

The Consumer Credit Market report from the  National Credit Regulator for the third quarter of 2023 shows that since the pandemic, the number of people deemed attractive loan prospects has declined. “What we are seeing is repeat lending to the same pool because there are fewer people who qualify for loans,” Sager says.

Nedbank’s Guide to the Economy says loan growth to households and companies weakened last year, pressured by higher interest rates and a faltering economy. Household loan growth slowed to 4.3%, its lowest level since March 2021, hurt by higher interest rates and tighter lending standards amid rising defaults. The report states clearly that “commercial banks will remain wary of accelerating credit extension given the strains on household finances”. DM