By: Given Majola - IOL Business

South African consumers’ disposable income was being eroded by persistently high interest rates and inflation (especially food inflation) while a lack of any meaningful economic growth was constraining their salaries.

This was revealed in the DebtBusters First Quarter 2024 Debt Index released yesterday.

The quarterly analysis of data from debt-counselling applicants also found that demand for debt management increased, with debt-counselling enquiries rising by 22%, and the use of online debt management services up by 30% compared with the same period last year.

DebtBusters executive head Benay Sager said the impact of increased interest rates on asset-linked debt was particularly evident in the above 40 years category.

“What also continues to be apparent is how higher-income earners are using credit to offset the dual impact of inflation and interest rates – now 475 basis points higher than in 2020,” Sager said.

“These consumers typically have more short-term loans than those in other income bands and devote a greater proportion of their income to repaying debt.”

The average interest rate for a bond has increased from 8.3% per annum in the last quarter of 2020 to 12.3% in the first of this year.

For a R1.5 million bond, this added an extra R4 000 per month to the repayment amount.

Compared with the same period in 2016 when DebtBusters first began analysing the data, this year’s first-quarter debt index found that purchasing power has diminished by 47%.

Nominal incomes were 1% lower than in 2016, while the cumulative impact of inflation over the eight years was 48%.

While some income groups saw real increase in incomes, on average the trend was slightly downwards.

The debt-service burden was also high, with the average debt-counselling applicant using 62% of net income to repay debt.

The situation was worse among higher-income earners as the data showed they had unsustainably high levels of unsecured debt.

The debt-to-income ratio for people taking home more than R20 000 per month was 127%, while it was 172% for those earning R35 000 or more.

These ratios were at or close to the highest ever.

“While average unsecured debt levels are up 14% compared to 2016, this is lower than recent quarters and is a welcome trend. What is concerning is that for people earning R35 000 and more, unsecured debt levels are 41% higher,” Sager said.

“This is in line with inflation and indicates that without meaningful salary increases these consumers are using debt to supplement their income. The average interest rate for unsecured debt is now at an eight-year high of 25.7% per annum.”

Sager said that the growth in debt counselling enquiries and use of online debt management tools was positive as it indicates more consumers are trying to become financially sustainable.

For those consumers who successfully applied for debt counselling, unsecured interest rates could be reduced by over 90%, from an average of 25.7% to approximately 2.6% per annum. This allowed expensive debt to be paid back faster.

Vehicle debt and balloon payments could be serviced over a meaningful period, with the average financed vehicle interest rate of 15.4% per annum negotiated down to a more manageable level.

Sager said the number of people successfully completing debt counselling had increased tenfold since 2016. Those who obtained clearance certificates during the first quarter of this year paid back over R600m worth of debt to creditors while they were in debt counselling.