The latest debt index for the third quarter shows that high-income earners are still battling to pay their debts, while there was a slight improvement in debt-to-income ratios and consumers continue to use credit to cope with the cumulative impact of inflation.
According to the DebtBusters Q3 2023 Debt Index, South Africans spend slightly less of their take-home pay on average to service debt, but debt-to-income ratios are still high and unsustainable for those in the top income bands.
While the slight reduction in the average annual debt-to-income ratio, from 115% in the third quarter of 2002 to 108% in the third quarter of this year, is welcome, it is coming off elevated levels, Benay Sager, executive head of DebtBusters, says.
While the debt-to-income ratio for consumers earning R20 000 to R35 000 per month decreased from 150% in the second quarter to 140% in the third quarter and that of people taking home R35 000 or more from 189% to 164%, these ratios continue to be at unsustainable levels.
Although it is the first time in a while that we recorded a decline, it is off a high base. In the second quarter the ratios for these income tiers were the highest they have been since 2016.
Demand for debt counselling and online debt management continues to grow, he says, with debt counselling enquiries up 28% compared to the third quarter of last year. The use of online debt-management tools also increased 65%, with younger consumers in particular using them to manage debt more proactively.High interest rates increased debt burden
Sager says sustained high interest rates increased the burden of servicing asset-linked debt, with the average interest rate for a bond rising from 8.3% in the fourth quarter of 2020 to 12.4% in the third quarter of this year.
The average interest rate for unsecured debt is now at an eight-year high of 25.5%.
It is telling that 96%, nearly all, the people who applied for debt counselling during the quarter had a personal loan and 20% had a short-term loan.
Compared to the third quarter of 2016, consumers who applied for debt counselling in the third quarter of 2023 had:40% less purchasing power. Nominal incomes were 1% higher than seven years ago, but cumulative inflation of 41% over that time means that in real terms take-home pay buys 40% less than in 2016. A higher debt-service burden. On average consumers spend 63% of their take-home pay to service debt. Consumers taking home R35 000 or more must use 67% of their income to repay debt. Unsustainably high levels of unsecured debt. Unsecured debt was on average 21% higher than in 2016. While the average level of unsecured debt is better than in some recent quarters, unsecured debt was up by 42% for consumers taking home R35 000 or more. This is on par with inflation and is evidence that, in the absence of meaningful salary increases, consumers use credit to supplement their incomes.
Sager says that debt counselling can reduce the interest rates on unsecured debt by more than 90%, from an average of 25.5%, to less than 2%. This allows consumers to pay back expensive debt faster and gives them breathing room to buy daily necessities.
The number of people completing debt counselling increased eight fold over the past seven years. Consumers who received their clearance certificates in the third quarter paid back over R500 million to their creditors.