If you were feeling squeezed financially – something many consumers are experiencing right now – which debts would you pay first and to which ones would you give lowest priority? Put another way, if you had a home loan, a vehicle loan, a personal loan, and payments to make on a credit card and a store card, which of these would you feel least guilty about skipping a payment?
Research by TransUnion has revealed fascinating insights into how people think about and prioritise their debts. At a media presentation last week, Carmen Williams, the director of research and consulting at TransUnion South Africa, presented findings of its payment hierarchy study of consumers with different debt products. The study was not about delinquency, she emphasised. “It’s about choice, and the consumer’s thought process during times of financial stress.”
The study consisted of two groups, each with a different combination of products. Group A was assessed for credit card debt, vehicle asset finance and housing loan debt, and had a corresponding higher-income, lower-risk profile. Group B was assessed for personal loans, credit card debt and store card debt, and people in this group tended to be lower-income earners presenting a higher credit risk.
People had to have all three products, the loans had to be current, and each person was tracked over one year. Delinquency was measured as one or more missed payments at the end of 12 months.
In this group, two of the three products were for secured debt, and were for relatively large amounts. The average repayment in January 2019 on a housing loan was R8 058, and the average repayment on vehicle finance was a surprisingly high R5 716.
Williams says conventional wisdom would suggest that the first product to enter into delinquencies would be credit cards. The next to go would be vehicle asset finance, and only in the most dire circumstances would people stop paying their home loans.
The graph below shows, however, that while credit card delinquencies are the highest, as predicted, those for home loans are above those for vehicle finance, suggesting that people give most priority to the repayments on their car.
A few suggested reasons are:
The higher amount on the housing loan, giving the distressed debtor “more to play with”.
The far longer repayment period on a housing loan than on a car loan, creating a “light at the end of the tunnel” effect on the car loan.
The perceived difficulty in evicting people from their homes, as opposed to repossessing their cars.
The importance of a car in people’s lives for getting to and from work.
In this group, all three products were for unsecured debt. The average payment in January 2019 on a personal loan was R1 975, on a credit card was R1 076, and on a store card R515.
Again, the results did not match expectations. Williams says one would expect people to pay their credit card debt first, because of the wide use people make of credit cards in their day-to-day transactions. Then they would pay their store cards, because of their future usability, albeit limited to a single store. And the product they would give lowest priority to when paying their monthly expenses would be a personal loan, from which the money has been received and already spent.
But, as shown in the graph below, the delinquency rates on personal loans were lowest, while those on store cards (retail) were highest, at a somewhat alarming rate of 28.43%. Credit cards were second priority, with almost half (14.49%) the delinquency rate of store cards.
Suggested reasons for the results are:
The prevalence of debit orders on personal loans
As with the car loan in Group A, a “light at the end of the tunnel” effect – the loan will be paid off within a relatively short period.
Loyalty to a lender, such as a bank, against loyalty to a retailer or product.
DON'T SKIP PAYMENTS
The worst thing to do is skip a payment on any of your debts thinking that there will be minor or zero consequences.
Missed payments are recorded on your credit report, and if you are two or more payments in arrears, you may go into default.
If you are stressed financially, you need to approach your credit providers with a view to a possible payment window or to restructuring your debt.
Lee Naik, the chief executive of TransUnion Africa, says it is amazing how few consumers access their credit reports (you are allowed one free report per credit bureau per year). He says South Africa has roughly 25 million consumers who have credit, yet TransUnion has never given out more than 400 000 credit reports annually. This is possibly because consumers don’t want to be confronted with bad news.
Naik’s advice is that you contact the credit bureaus, get the free reports you are entitled to, and know where you stand with your creditors.
SA CREDIT DEPENDENCE EASES SLIGHTLY
The TransUnion SA Consumer Credit Index (CCI) has increased slightly to 49 for the second quarter of 2019, from 48 for the first quarter. The index measures consumer credit health where 50 is the break-even level between improvement and deterioration.
TransUnion’s Carmen Williams says the index has now trended near the 50-point level for a year, implying that while households are affected by the tough economic conditions, these have been somewhat offset by relatively low interest rates and a more cautious approach to taking on further debt.
“For consumer credit health to improve meaningfully, the economy needs to grow much faster, employment and income levels need to increase, and many households will need to pay down their lingering debt burdens. Until then, it will be difficult for credit providers to expand consumer lending, and consumer credit markets will likely remain highly competitive,” Williams says.
According to the second-quarter CCI report:
Accounts in early default (three months in arrears) increased by 1% year-on-year (y/y), far less than the more than 8% y/y in the first quarter, “yet it is too soon to tell if this is a meaningful reversal in the rising default trend”.
Distressed borrowing (the use of revolving credit) fell 1% y/y, but “credit card consumers are battling to reduce their reliance on their revolving credit cards and finding it hard to sustain their utilisation rates below 50%”.
Household cash flow fell by 0.5% y/y. “While non-discretionary household inflation was soft in the second quarter (4.6% y/y), household income growth remained very weak, based on Statistics SA and SA Reserve Bank (Sarb) data”.
Household debt service costs (according to Sarb data) did not change materially during the quarter, but a rate cut in July “should diminish repayment pressure slightly in the third quarter”.
Consumer accounts measured: 55 million.
Number of accounts three months in arrears: 960 000