Indebted consumers have 39% less buying power
J– Indebted consumers now have 39 per cent less buying power than in 2016, while their nominal income is only one per cent higher when cumulative inflation of 40 per cent is considered.
They also have on average 32 per cent more unsecured debt than in 2016 and a much higher debt-service burden.
According to the DebtBusters’ Q4 2023 Debt Index released on Tuesday, consumers who applied for debt counselling in the fourth quarter are much worse off than in 2016, when DebtBusters began collecting and analysing the data.
They also have a higher debt-service burden. Before entering debt counselling, consumers spend on average 62 per cent of their take-home pay to service debt. Those earning R35 000 or more per month use 71 per cent of their income to repay debts.
The debt-to-income ratio for the top income bands is 131 per cent for those earning R20 000 per month and 171 per cent for people taking home R35 000 or more. For these income bands the ratios are at or close to the highest-ever levels.
Unsecured
In addition, they have unsustainably high levels of unsecured debt. Their unsecured debt is, on average, 32 per cent higher than in 2016. For those taking home more than R35 000 a month, it is 42 per cent higher.
“Although this is on par with inflation, it shows that in the absence of meaningful salary increases, consumers are supplementing their income with unsecured debt,” Benay Sager, Executive Head of DebtBusters, says.
“Increasing food, electricity and fuel prices drove inflation, with the Reserve Bank countering by increasing and sustaining interest rates which are now 475 basis points higher than in 2020. In addition, crippling levels of load-shedding constrained meaningful economic growth and consequently salary increases.
“The average interest rate for a bond grew from 8.3 per cent per year in the fourth quarter of 2020 to 12.3 per cent by the fourth quarter of 2023. Average interest rates for unsecured debt are now at an eight-year high of 25.6 per cent.”
The index found debt counselling enquiries increased by 46 per cent and demand for online debt management was up 54 per cent compared to the same period in 2022. Full-year debt counselling enquiries grew by 39 per cent compared to 2022, indicating an acceleration in the final quarter of 2023.
Sager says that while the combination of high inflation, interest rates and poor economic performance negatively impacted disposable income, the fact that more people are seeking help to manage debt is positive.
Proactive
“The increasing use of online debt-management tools indicates consumers are 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.
When consumers enter debt counselling, debt counsellors can renegotiate interest rates for unsecured debt from 25.6 to 2.6 per cent,” he says. This allows consumers to pay back expensive debts quicker. Interest on vehicle debt and balloon payments, which average 15.6 per cent, can also be negotiated down and the period extended.