Top earners resort to borrowing to supplement income as Covid-19 bites
CAPE TOWN – South Africans faced with increased financial strain, even before lockdown, are taking on more debt to supplement incomes that had declined in real terms, according to DebtBusters’ quarterly debt index.
The report for the first quarter of 2020 found that consumers who signed up for debt counselling had nominal incomes that were 1 percent higher than in 2016, but because of cumulative inflation growth of 19 percent, real incomes declined by 18 percent – a massive blow to the average consumer.
DebtBusters’ chief operating officer Benay Sager said on Friday that it was clear that consumers were borrowing more to make up for the shortfall in real income growth.
“There has been a substantial increase in average borrowing to supplement the decline in net income, with total debt up 33 percent on average compared to the same period in 2016. Total debt for top earners increased by 63 percent compared to Q1 2016 levels.
“The number of consumers with home and vehicle finance seeking debt counselling has grown substantially. Those taking home R20 000 or more a month had a debt to annual income ratio of 142 percent, which is unsustainable,” he said.
Sager said the number of credit accounts consumers had when they applied for debt counselling indicated that consumers were getting over-indebted faster but were also seeking help sooner.
“The silver lining is that debt counselling is incredibly effective. The number of clients who have successfully completed the process has increased by 65 percent per annum over the past four years. The process works, and is a fantastic tool to help consumers who are overwhelmed with debt,” he said.
DebtBusters also gave advice on why consumers may need to consider debt counselling. Sager answered some commonly asked questions about debt counselling:
What is debt counselling and how do I know if it’s for me?
Debt counselling was introduced as part of the National Credit Act in 2007. It helps over-indebted or soon-to-be over-indebted consumers repay their outstanding debt through an affordable repayment plan that is agreed with all creditors. While there is a technical definition of what over-indebtedness is, a good rule of thumb is that if you’re struggling to pay your debts on time or a feeling distressed about your financial situation you should talk to a debt counsellor. Anyone who is struggling with debt can apply. If you are married in community of property you must apply with your spouse.
How does it work?
When consumers contact a registered debt counsellor, they should be given a free debt assessment. This will determine your level of debt and whether debt counselling is a suitable option. If the assessment determines you are over-indebted then may formally apply for debt counselling. Once you do so, the debt counsellor will do most of the heavy lifting, informing all your creditors as well as the credit bureaus that you have applied. The debt counsellor would then negotiate on your behalf with all your creditors in a bid to reduce monthly payments on all credit agreements that fall under the National Credit Act. This is done within agreed industry norms and is based on what you can afford. It is not something most people can easily or efficiently do on their own, especially when there are several creditors involved. Once more affordable repayment rates are negotiated, your ‘rearranged debt’ is then approved by a court or National Consumer Tribunal to ensure the renegotiated rates are fixed for the duration of the debt counselling.
How do I choose a debt counsellor?
All debt counsellors are registered by the National Credit Regulator and registration information can be found on the NCR website. Choose a debt counsellor who is registered with the NCR. Ask the debt counsellor if they use the Debt Counselling Rule Set (DCRS) system, which is the industry golden standard and benefits consumers and creditors alike.
How do the repayments work?
You will make one affordable repayment each month. This is paid to an Independent Payment Distribution Agency (PDA) – also overseen by the National Credit Regulator - which distributes the money on your behalf to all the creditors included in the debt counselling for the duration of the plan. Debt counselling is highly regulated, and all the relevant fees are built into the single payment amount. The National Credit Regulator sets the fee guidelines.
How long does debt counselling take and once it is approved am I on my own?
Debt counselling usually lasts between three to five years, depending on the amount of debt, the arrangement the debt counsellor is able to negotiate and what you can afford to pay each month. The debt counsellor’s service staff are available throughout the process to offer advice, support and communicate with creditors.
Can I still apply for credit while under debt counselling?
No. Only once you have completed the programme and received a clearance certificate can you again apply for credit. Then it is advisable to draw up a realistic budget and discuss this with the debt counsellor or a financial advisor before applying.