Bad news for people earning R35,000 or more

The unsecured debt levels for South Africans taking home R35,000 or more have risen sharply, as, without meaningful salary increases, these consumers need to supplement their income with unsecured credit.

This was revealed in DebtBusters’ Q3 2024 Debt Index, a quarterly evaluation of debt counselling applications.

The report found that, despite improved sentiment, consumers still face financial strain as personal loan interest rates reach their highest levels

“Although sentiment has improved since the suspension of load-shedding, the formation of a coalition government, reduced inflation and interest rates, and the ability to access some retirement savings, consumers are still under severe financial strain,” said Benay Sager, executive head of DebtBusters.

Despite this series of positive developments, demand for debt counselling increased by 6% compared to the same quarter last year, and online debt management grew by 10%.

Sager said that over the past eight years, income growth has not kept up with significant cost increases, and consumers are using short-term unsecured credit and personal loans to make up the shortfall. 

As a result, consumers need to allocate two-thirds of their take-home pay for debt repayments.

He said 82% of people who apply for debt counselling have a personal loan, and 53% have a payday loan. “This, at a time when unsecured interest rates are at 26.7%, close to the maximum 29%.”

Other findings from the third quarter 2024 Debt Index are that, compared to 2016, consumers who applied for debt counselling had:

• 44% less purchasing power. Electricity costs 135% more than eight years ago, and the petrol price has doubled, contributing to cumulative inflation of 46%. Over the same period, nominal incomes have only increased by 2%.
• A high debt service burden. Before coming to debt counselling, consumers spent 66% of their net income to repay debt. This is up sharply compared to the last few quarters and is the highest since 2017. 

The index found that people taking home R35,000 per month use 72% of their income to repay debt, and their total debt-to-net-income ratio is 176%. 

The most vulnerable consumers, who earn R5,000 or less a month, use 75% of their income for debt repayments. Sager said these ratios are at their highest-ever levels.

Worryingly, the average unsecured debt level was 22% higher than eight years ago but is lower than the same period last year. 

For people taking home R35,000 or more, unsecured debt levels were 52% higher. 

“While only slightly higher than inflation growth, without meaningful salary increases, these consumers need to supplement their income with unsecured credit,” Sager said.

This group also has the highest debt-to-income ratio among the income groups and the second-highest monthly debt repayment ratio.

He explained that debt counsellors can renegotiate interest rates on unsecured debt from 26.7% to much lower single-digit rates, which allows consumers to repay the most expensive debt faster. 

By reducing the average interest rate of 15.3% to a more manageable level, vehicle debt and balloon payments can be paid over a meaningful period.

“Debt counselling in South Africa works and benefits both consumers and creditors,” he said. 

“Since 2016, the number of people who have successfully completed debt counselling has increased ninefold. In Q3 2024 alone, consumers who received their clearance certificates paid back over R665 million worth of debt.”