Finance

South Africans turning to short-term loans

Many South African consumers are turning to short-term loans to provide quick relief. However, reliance on this expensive, short-term, and unsecured credit poses significant risks for financially vulnerable households. 

This is according to FNB economists in the latest Economics Weekly, wherein they analysed the latest National Credit Regulator data.

This data revealed a mixed bag for South African consumers in the second quarter of 2024, reflecting both growth and challenges. 

The total value of new credit granted increased by 5.5% quarter-on-quarter, reaching R139.8 billion. However, this was a 1.6% decline compared to the same period in 2023. 

“While this growth suggests resilient borrowing demand, a high rejection rate of 68.03% indicates stricter lending standards due to economic uncertainty,” the economists explained. 

South Africa’s high interest rates over the past few years have seen several lenders closing the taps, including big banks like Capitec and Standard Bank.

As interest rates have come down and are expected to decrease further over the next few months, many lenders have since eased their lending criteria.

In the second quarter of this year, a significant driver of credit growth was a rebound in mortgage lending, which increased by 18.9% quarter-on-quarter. 

FNB’s economists said this suggests renewed confidence in the housing market, supported by easing political uncertainty and anticipated interest rate cuts. 

However, despite this quarterly surge, the overall year-on-year decline of 4.6% points to a housing market that is recovering rather than outperforming. 

“While lower interest rates could boost mortgage demand, stricter lending criteria and high default rates remain obstacles,” the economists said.

FNB South Africa chief economist Mamello Matikinca-Ngwenya

When it comes to consumption credit, secured credit, which includes vehicle finance, remained relatively flat, with a 1.0% quarter-on-quarter increase. 

However, within this category, credit for buying furniture and other durables delivered another quarter of strong performance, rising by 9.2% quarter-on-quarter. 

“This renewed outperformance aligns with strong retail sales for furniture and appliances in the last few months and may, in part, be fuelled by a replacement cycle as more consumers now spend more time at home, thus reducing the lifespan of household contents,” the economists explained.

Where secured credit grew, unsecured credit declined by 0.3% quarter-on-quarter, reflecting growing lender caution about consumer financial health. 

Interestingly, short-term credit – a segment typically used by consumers for smaller, immediate needs – rose by 3.4% quarter-on-quarter and by an impressive 31.9% year-on-year. 

“This suggests that more consumers are turning to short-term loans, possibly due to limited access to other forms of consumption credit,” they explained. 

However, the economists cautioned that while short-term loans can provide quick relief, they often carry higher interest rates, raising concerns about debt sustainability for households already under financial pressure. 

In addition, credit facilities, like credit cards and store cards, increased by 4.2% quarter-on-quarter. 

“This reflects growing consumer reliance on revolving credit to manage their finances,” they said. 

However, the high credit application rejection rate of 68.03% highlights the challenges many consumers face in accessing new credit.

This is likely why many South Africans are turning to more risky short-term credit options to get through the month.

“The implications of these trends for consumers are mixed. Those with access to mortgage and secured credit may benefit from improved market conditions and lower interest rates,” the economists said. 

“However, reliance on expensive, short-term, and unsecured credit poses risks for financially vulnerable households. Many unsecured loans are not tied to prime lending rates, so lower interest rates may offer limited immediate relief.” 

“This uneven credit recovery highlights the risk of over-indebtedness for certain consumer segments, emphasising the importance of careful financial planning.”

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