Unsecured loans risky for those in debt

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Consumers felt they had less cash last year than in 2012, according to the latest MBD Consumer Financial Vulnerability Index. File photo: Simphiwe Mbokazi

Johannesburg - With access to easy loans increasing and more consumers borrowing money than before, financial advisers and debt counsellors warn that households are overburdened with debt.

They are urging consumers to save money to avoid “festive season hangovers”.

According to the latest Finscope 2013 survey, nearly 20 percent of unsecured loans taken by consumers were for bills, monthly fees or unexpected personal expenses.

It also revealed that nearly a quarter of South Africans were experiencing financial difficulties.

Debtbusters chief executive Ian Wason said the first signs of over-indebtedness were already showing. To date, they had received 80 percent more debt counselling applications compared with the same period last year.

Wason was concerned about the worsening levels of debt and believed the worst was still to come.

The unsustainable increase in payday loans was one of the factors that aggravated indebtedness, eroded spending power, he said.

“Something drastic and urgent needs to be done to protect South African consumers and to reduce the risk of over-indebtedness,” said Watson. “Historically, a spike in personal loan defaults precipitates a spike in non-performing loans and other lending products.”

The Finscope survey, which is an annual representative study of the demand for, usage of and access to financial services in South Africa, was released last month.

Although secured loans were on the increase, the study showed it was the increase in unsecured loans which was of concern.

Currently, there are 14.2 million people with some form of credit or loans. Of these, 7.6 million are males. One million people have a personal loan from a bank, while 140 000 people have a loan from a retail store and 27 000 have a loan from an insurance company.

The survey, released last month, showed that women over the age of 30 who had formal credit were more likely to be over-indebted.

”People with formal credit are more likely to have taken credit from other places, including friends and family, colleagues, employers, retail stores, mashonisas and stokvel or burial societies.”

They tended to have several reasons for borrowing (bills, clothes, children’s education, food and home improvements).

They were less likely than other people to be going without food or heat and energy, because they were borrowing to cover these expenses.

According to the study, formal savings had declined slightly and 58 percent of adults claimed they were currently not saving.

Catherine Kannemeyer of the political economy faculty at the Mapungubwe Institute for Strategic Reflection (Mistra) said South Africa’s culture of low savings was an obstacle to development, which needed further scrutiny.

While the Finscope survey showed an irresponsible use of credit and a need for consumer education, Kannemeyer said it also revealed the plight of people who were using “prohibitively expensive debt” to finance day-to-day needs, such as education and durable goods.

While credit was useful, it posed risks, especially when consumer protection was ineffective and regulations did not ensure that individuals were left with a living wage.

Mistra had done research into factors that contributed to the low saving rate in South Africa. The institute’s full research would be released next year. “We live in a country where income is exceedingly unequally distributed and the potential to save is for many people practically impossible.”

Kannemeyer referred to a study by Stellenbosch University’s research group on socio-economic policy, which showed that the emergent black middle class was educated and affluent, but was less likely to spend money on holidays or insurance, as it overcame historical material disadvantages. Spending patterns were, however, risky, because the group’s reliance on unsecured loans posed a significant risk.

This finding was in line with a worrying trend that unsecured lending had doubled in the past year.

According to the research group’s study, the emergent black middle class had fewer assets such as homes, cars and other durable appliances than counterparts of other races. “Needing to furnish homes and get around, the newly established members of the middle class have an asset deficit to overcome,” said Wason.

This trend, according to the researchers, explained lower spending on categories such as holidays and insurance compared with the established class.

“The pressure of middle-class aspirations for individuals with little to no wealth is also significant, and the rise in unsecured lending poses a significant risk to certain individuals as they try to close the gap in consumption between poor and rich,” said Kannemeyer.

Sunday Independent

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