More consumers accessing personal loans, credit card facilities to support day-to-day expenses

More South Africans are deciding to take out personal loans or overuse their credit cards to keep up with their expenses, which is making consumer debt increase.

Consumer debt in South Africa increased to R1.72 trillion in outstanding debt, according to the latest Consumer Default Index (CDI), released by Experian South Africa.

The CDI went from 3.76 percent in the second quarter to 3.93 percent in September, due to a general deterioration in first-time defaulters specifically across unsecured banking products, that is, credit cards and personal loans.

Jaco van Jaarsveldt, Decision Analytics Head Consulting and Marketing Services at Experian SA said the deterioration in the unsecured banking product performance could be attributed to the high demand for personal loans, which were more broadly accessible to consumers.

“Due to the tougher economic climate, more consumers are accessing personal loans and available credit card facilities to support their day-to-day expenses,” said Van Jaarsveldt.

Personal loans showed the biggest increase year on year from 8.03 percent in 2018 to 8.84 percent in 2019 of first-time product defaults amounting to R6.2 billion, according to the latest CDI. First-time credit card defaulters similarly increased from 6.58 percent to 6.63 percent year on year amounting to R2.2 billion in balances defaulting for the first time since opening.

One of the main reasons behind these numbers are the difficulties the South African consumer is going through, particularly the lower income consumer, such as the weak economic climate or the general rise in the cost of living.

“Year-on-year real wage growth per worker turned slightly negative in the third quarter, with private sector real wage per worker declining 2 percent from a year ago. This is despite South Africa experiencing its lowest levels of inflation in a decade,” said Stephán Engelbrecht, a fund manager at Anchor Capital.

Another reason is the high unemployment rate that hits South Africa. The third quarter’s unemployment rate was 29.1 percent - the highest rate in more than 16 years -, which worsens the consumer’s economic situation and increases the demand for unsecured lending products without first comparing the available options.

“As we continue to see increasing levels of unemployment in South Africa, we expect the consumer to remain under pressure financially in the coming months, which will result in a continuous high demand for unsecured lending products. We expect lenders in unsecured loans and credit card market to review their lending criteria to manage the deteriorating portfolio performance, which could make access to credit even more difficult for consumers,” says Van Jaarsveldt.

Amidst this scenario, the National Credit Regulator (NCR) warned consumers against spending recklessly and to be smart and responsible spenders during the last Black Friday in November.

In order to buy smartly, consumers were advised to draw up a list separating “needs” from “wants”, and to look at their budget to check whether they have enough money to afford their purchases. If it’s not enough and they had an option to buy on credit, they had to consider the credit-related costs that they had to pay over time.

As the festive season approaches, consumers rely a lot on credit to meet their expenses. It’s really important for everyone to know what the costs of the unsecured lending products are to avoid slipping deeper into debt.

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