Unsecured lending on the up

In what is arguably one of the toughest economical climates to date, South Africans are having to turn to unsecured loans, such as ‘pay day loans’, at an alarming rate.

“Of particular concern is the risk this has on other secured loan agreements, where 35% of these clients with ‘pay day’ type loans also have a vehicle loan and 17% have a bond. For February, DebtBusters saw an increase in debt counselling applications of up to 38% for clients with mortgages and/or vehicle finance. We also saw our higher income earner client group grow twice as fast in number of clients, as other income groups,” said Benay Sager, COO of DebtBusters.

Sager suggested that there was a visible change not only in the inclination to unsecured debt but also the type of earners who are buying into this. “Where before it was mostly lower income earners that had most of their debt as unsecured, we are now seeing a change where all income groups have a large proportion of unsecured debt. This ranges from 37% (for those earning more than R20k per month) to between 57 and 83% (for those earning less than R20k per month), as a percentage of their total debt.”

The reasons for this trend vary, but according to Sager some of the commons ones include:

-The lender’s need to support not only themselves but their families: These consumers are under massive financial pressure and have on average eight credit agreements which often include a mortgage and vehicle finance. As soon as an expensive ‘pay day’ type loan is added to this mix, they become cash-strapped to the point where they require up to 102% of their net income just to service their debt. In fact, those earning less than R5, 000 per month would have required 146% of their net income to pay their monthly debt repayments, which is an impossible task,” said Sager.

- Cost of living: Following the Consumer price index figures that reveal a 6.2 percent ‘year-on-year increase’ the prices of basics like electricity, food and transport are all affected.

“Recently, Pietermaritzburg Agency for Social Development (Pacsa) noted that between January and February alone, the price of a basket of basic food items increased from R1 797.04 to R1 879.24. The Pacsa report points out that a 25kg bag of the staple food for poor families - maize meal - increased by R21 (12%) in that time,” stated Sager.

- Poor savings habits: Post the release of statistics issued by the South African Reserve Bank (SARB) in July of last year, South Africa has one of the worst savings rates globally.

“South Africans don’t save for unforeseen expenses and neglect to plan adequately (if at all) for their retirement. Hence why we see more and more consumers in financial difficulty having to support their parents or being knocked financially by an unexpected life event,” commented Sager.

- Limited financial education: The increase in people under the age of 25 who are also struggling with managing debt, is a concern.

“DebtBusters’ Debtometer report reveals an increasing number of people under the age of 25 who are struggling with debt, with almost 30% of new DebtBusters clients under the age of 30.  South African school leavers lack both the means and the foundations for basic financial management. This paves the way to poor money management early on in their adult lives and develops bad financial habits later on, such as accruing debt and missing account payments.

“This inevitably leads to a situation where these youngsters (in their early 20’s) are subjected to more borrowing to repay existing debt and to meet day-to-day obligations,” Sager highlighted.

- South African’s addiction to debt: Various studies, reports and statistics have all gone to show that South African’s are addicted to debt, and not the good kind. “South African’s are addicted to shorter term expensive debt – consumers do not care about the costs, they care about getting the cash, now! This addiction (driven by desperation for cash) has led to the increase in pay day loans, with over two million South African’s relying on ‘pay day’ type loans every month, according to the latest Consumer Credit Market Report (CCMR),” commented Sager.

- Lack of a debt management plan: Still in this day and age, many people fail to budget. “Too many South African households don’t have a budget, have never seen their credit report and have no means for tracking their monthly expenses or managing their cash flow. With increases in debt repayments and the cost of living, it has become vital for consumers to take control of their personal finances by adopting responsible habits with their money,” said Sager.

- Hikes in the Repo rate: There is also increased pressure due to recent repo rate hikes. “Two consecutive hikes in the repo rate on the back of Christmas spending and in the beginning of a new year (which in itself brings big expenses and annual increases) marked the beginning point for tough financial times for many,” concluded Sager. 

“Credit is one of the cornerstones of modern capitalism that lubricates the economy and promotes commercial activity. However, credit enables people to spend money they don't have, spend more money than they earn, use credit for ordinary purchases, use credit even when they have cash and use debt to pay off debt. The use of credit and poor money management skills often leads people into a situation of over-indebtedness where they are unable to service credit agreements,” added the Banking Association of South Africa.