Consumer debt falling by the billions

Personal consumer debt has fallen sharply amid the Covid-19 pandemic but there are concerns about how borrowers will pay it back as cost of living pressures rise.

Reserve Bank figures show consumer debt fell from $15.14 billion in June 2020 to $13.3b in May this year. Of that, bank consumer debt has plummeted from $9.76b to $7.3b and non-bank consumer debt has risen from $5.37b to $6b.

Centrix managing director Keith Mclaughlin believed the fall was driven by responsible lending legislation which tightened in recent years and by changes to credit reporting. “Credit providers and lenders have a lot more information now to make better decisions. Whereas historically, we were just reporting defaults and they were at least 90 days behind.”

But defaults and arrears were showing signs of tracking upwards.

“We were tracking right down but are starting to see a bit of a spike in auto loans, and personal loans went through a spike a month or so ago.”

He said New Zealanders typically prioritised debt payments by paying for mortgage and car loans first.

Defaults or arrears were more likely on unsecured lending — in other words, credit cards.

“Someone who was paying it off in full every month might just pay the monthly minimum amount payable, which means they will be paying more out in interest because interest rates on cards are not cheap, which exacerbates the problem.”

Mclaughlin said at the moment, people appeared to be coping with living off what they earned.

But if costs continued to rise without income keeping pace, it put a squeeze on disposable income and ability to pay for debts.

“I don’t think it has really hit them yet because a lot of the mortgages haven’t been recalibrated at higher rates, but they know what is coming.”