Consumer debt in South Africa increased to R1.72 trillion in September. This is according to Experian’s Consumer Default Index (CDI) for the third quarter, which increased from 3.76 percent in the second quarter to 3.93 percent.

The increase in outstanding debt was mainly due to a deterioration in first-time defaulters, specifically across unsecured banking products (credit cards and personal loans).

Personal loans showed the biggest increase year-on-year, from 8.03 percent in 2018 to 8.84 percent in 2019, with first-time defaults amounting to R6.2 billion.

First-time credit card defaulters similarly increased from 6.58 percent to 6.63 percent year-on-year, amounting to R2.2bn in balances defaulting for the first time since they were opened.

“The deterioration in the unsecured banking product performance can be attributed to the increased demand for personal loans specifically, which are more broadly accessible across the various consumer market segments.

“Due to the tougher economic climate, more consumers are accessing personal loans and available credit card facilities to support their day to day expenses,” says Jaco van Jaarsveldt, decision analytics head: consulting and marketing services at Experian South Africa.

The CDI indicates that first-time default rates for secured banking credit have improved year-on-year, with home loans decreasing from 1.56 percent to 1.50 percent, and vehicle finance decreasing from 3.66 percent to 3.54 percent.

“The improving trend in the secured banking product default rates can be attributed to the more conservative approach to taking on additional debt from the segments of the market that have access to secured lending products,” says Van Jaarsveldt.

Retail loans performance, a new addition to the Experian CDI, has seen a significant improvement in the rate of first payment defaulters, from 14.14 percent in 2018 to 12.77 percent in September 2019.

“This trend can be attributed to the 2018 pre-festive tightening in credit lending criteria implemented by most retailers, which is now yielding results, as overall industry default rates show marked improvements,” says Van Jaarsveldt.

The third quarter’s unemployment rate was 29.1 percent - the highest rate in more than 16 years.

“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 the 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.

Meanwhile, the National Credit Regulator (NCR) has cautioned consumers against spending recklessly and to be smart and responsible spenders this Black Friday.

Consumers are advised to draw up a list, separating “needs” from “wants”, and look at their budget to check whether they have enough. If it’s not enough and you have an option to buy on credit, consider the credit-related costs that you will have to pay over time and your ability to repay the debt, and decide whether it is worth spending on credit for Black Friday.

“If you did not plan and budget for Black Friday, you are cautioned not to use credit. This is because you will not be saving as credit costs more,” says Kedilatile Legodi, the acting manager: education and communication at the NCR.

When you buy on credit, you are liable for costs such as interest, monthly service fees, once-off initiation fees and credit life insurance.

Consumers should never take for granted the value of planning and budgeting. By drawing up a list, you avoid falling into the trap of buying things you don’t need. By budgeting, you will ensure that your spending is within your means.

Buying on credit without a plan may lead to inability to repay the credit granted. If you cannot repay the credit, credit providers will take legal action, and this will negatively affect your credit record.

Once you have a negative record, not only will accessing future credit be a struggle, it will also be expensive, because credit providers will charge you higher interest rates compared with those who have positive credit records.

This can also affect people seeking employment where the job requires you to deal with finances.

Legodi says impulsive buying on credit for unplanned Black Friday specials will not save you any money.

She further cautions consumers not to allow Black Friday lead to a “blacklisting” and letting a one-day event lead to a lifetime struggle. 

PERSONAL FINANCE