Warning to South Africans with debt

Following three consecutive interest rate cuts, with more expected, FNB has cautioned South Africans against using these cuts as an opportunity to take on bad debt.

FNB Retail Loans CEO MJ Davis said the Reserve Bank’s recent decision to lower interest rates by 25 basis points for the third time in six months may provide some much-welcomed relief for South Africans with debt.

“The high-interest rate environment of the past couple of years affected the cash flow of many South African households,” he said. 

“Consumers are counting on these rate cuts to offer them some financial reprieve as they continue their money management efforts.”

He explained that reduced borrowing costs and lower monthly repayments due to rate cuts have tremendous potential to free up cash flow and prevent the average person from falling into further financial distress.

However, FNB Integrated Advice product head Ester Ochse warned consumers against falling into complacency. 

“We need to be very careful and disciplined. While lower rates make borrowing ‘cheaper’ in the short term, consumers shouldn’t be tempted to get into further bad debt, which could put one in a worse-off financial position in the long term,” she said.

“We don’t know for sure what will happen with interest rates but at some point, they will rise again, making debt instantly more expensive again. Therefore, it’s wise for consumers to assess their ability to manage debt.” 

She explained that, in general, if someone is already stretched financially, further debt could lead to more instability if they do not have a solid repayment plan or aren’t borrowing for productive reasons like investing or saving.

Ochse also noted that lower interest rates also mean lower returns on savings. 

“While it might feel like you can spend a lot more freely, don’t forget to pay yourself in savings first before you spend your money elsewhere,” she said. 

“You can’t afford to fall behind on your savings. In fact, add a little more to your savings pot monthly now that you have some extra cash flow.”

While the lower interest rate environment may facilitate paying less interest on debt owed, Ochse said it would be more productive to try to pay higher instalment rates. This is because it would mean paying less interest in the long run.

Davis pointed out that interest on debt is something that most people do not fully understand.

“The reality is that retail store cards for things like clothing or furniture carry higher interest rates than bank credit cards, for example,” he explained. 

“So, consumers should fully acquaint themselves with the terms and conditions of having these types of facilities.”

“It’s better to save for items that you may not be able to afford right now through savings, group savings or stokvels rather than taking out high interest-bearing store cards.” 

He said the latest round of rate cuts presents a silver lining for some, but for others, it might be difficult to see the tree for the woods.

In the latest Economics Weekly, FNB economists noted that while demand for credit remains high in South Africa, particularly now that the Reserve Bank is in an interest rate cutting cycle. 

The National Credit Regulator’s latest data for the third quarter of 2024 revealed that secured credit expanded in this quarter.

However, weak new mortgage lending and higher short-term loans suggest enduring financial pressure on some households. 

The economists explained that high credit rejection rates limit many people’s access to formal credit, potentially driving them towards costly alternatives.  

This is due to lenders in South Africa remaining cautious, with rejection rates at 67.6%, down slightly from 68.0% in the second quarter of last year.

Banks dominate the local credit market, with these institutions controlling 79.3% of new loans and 85.1% of the gross debtors’ book.

However, non-bank lenders – many of which are often seen as more “risky”, short-term debt providers – are growing their credit extension a lot faster than traditional banks.

The economists previously cautioned that while short-term loans can provide quick relief, they often carry higher interest rates.

This raises concerns about debt sustainability for households already under financial pressure.

“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.” 

They said this uneven credit recovery highlights the risk of over-indebtedness for certain consumer segments, emphasising the importance of careful financial planning.