In-debt consumers value cars over homes
People prioritise paying their vehicle loans over their mortgage bonds, study finds
IN A STUDY believed to be the first of its kind in South Africa, TransUnion, a leading global risk and information solutions provider, revealed which debts consumers prioritise during times of financial stress.
Contrary to conventional wisdom, people don’t always look to safeguard home loans; rather, they look to protect their cars, paying vehicle loans in preference over other forms of credit.
The research, which observed the payment behaviour of 325 000 South African consumers, looked at borrowers with at least one of each of the three primary credit products: a credit card, a vehicle loan and a housing loan.
The study tracked them over time to see what happened when they were unable to meet all their credit commitments, and how they prioritised which obligations to pay above others.
The payment hierarchy is a common term used in consumer lending and refers to the priorities that consumers place on different credit products when they are facing financial stress and don’t have enough money to pay all their obligations. It looks at which payments people prioritise and pay first, and which they place a lower priority on and pay last.
When faced with the choice of which debts to pay and which to miss between a popular set of credit products – credit cards, vehicle loans and housing loans – conventional wisdom may suggest the first product type to enter delinquency (that is, the one consumers would miss a payment on first) would be a credit card, followed by a vehicle loan.
Further, it might be expected that only in the most dire of circumstances would consumers stop paying housing loans, prioritising those payments above all other debt types.
The rationale, so the conventional wisdom goes, is that missed payments on a card do not put any important collateral at risk, automobiles are critical for efficiently getting to daily activities, and, of course, the home is the centre of one’s family life and the most important asset a consumer can own.
However, the TransUnion study found that the most commonly seen hierarchy among this set of products is, in fact, different than conventional wisdom would suggest. Consumers generally place vehicle loan payments first, prioritising those payments ahead of home loans. Credit cards, as expected, are the product in this set that consumers prioritise last and are most likely to miss.
“It’s not always about protecting your home,” said Carmen Williams, the director of research and consulting for TransUnion South Africa. “It might be the size of the payment required, access to other forms of credit and even what you feel the perceived consequences might be. Consumers and lenders alike often have to wrestle with these problems.”
As part of the study, TransUnion also explored the payment priority among popular unsecured credit products, specifically credit cards, personal loans and retail store accounts.
Unsecured products are typically used to finance small purchases and day-to-day living expenses.
When looking at about 375 000 consumers with this basket of popular unsecured credit products, conventional wisdom again proved wrong.
The assumption historically has been that consumers would base their payment hierarchy on the concept of future utility, prioritising credit cards over other forms of popular unsecured credit, because a credit card would still be available for further use across other purchases, potentially with multiple merchants. Retail store cards would be next – again, because future utility exists. Finally, personal loans would be last, because the funds have already been received and spent, and the loan would be perceived to have no future utility.
However, the TransUnion study found that the most common unsecured credit hierarchy saw personal loans given the highest priority among consumers during times of financial stress. Next came credit cards, with retail cards at the bottom of the hierarchy.