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In what is a sure sign of tough times, South African consumers are taking on more unsecured credit, while their use of secured credit to finance major purchases such as motor vehicles and property has tapered off. On top of this, more people are defaulting on their debt repayments, including on housing and vehicle loans.

The recently released TransUnion South Africa Industry Insights Report for the first quarter of this year shows that outstanding balances (the total of what everyone owes) across all major credit categories increased in the 12 months to the end of March.

Secured credit is a loan backed by an asset that acts as security in the event that you cannot pay back what you owe. With a housing loan, for example, your house is that asset, and the bank can attach the property if you fail to keep up with your bond repayments.

Unsecured credit is credit extended to you without any form of security. Even though you need to go through the assessment process and be approved for the credit offered to you, there is no asset linked to the loan. This is reserved for smaller lines of credit, such as credit cards, bank overdrafts and personal loans.

The problem is that while you may have only one or two secured loans, you may have numerous unsecured loans in various forms, and may be using these for everyday purchases, such as for food, clothing, electronic goods and furniture.

Credit used for such purchases is “bad debt”, because the goods it buys are consumed or decrease in value, putting you in a worse financial position than before.

“Good debt”, on the other hand, is used to buy assets that increase in value, such as property, or to invest in your education or to start a small business, with the aim of improving your financial position and growing your wealth.

The TransUnion report shows that, at the end of March, credit card balances had increased by 6.6% year-on-year, while bank personal loans and non-bank personal loans had increased by 7.2% and 11.4% respectively. New accounts also increased: numbers were up 8.4% for credit cards, 11.3% for bank personal loans and 15.8% for non-bank personal loans.

Secured credit to finance home and vehicle purchases saw more muted growth: home loan balances increased by 3.1% and vehicle loan balances grew just 0.2%. New loan numbers were weaker also, with new home loans essentially flat at 0.5% and vehicle loans down 2.5%.

Volatile conditions

“Consumers and lenders alike are wrestling with the continued volatile economic conditions,” says Carmen Williams, director of research and consulting for TransUnion South Africa. “In the first quarter of the year, we observed a significant increase in the level of borrowing on unsecured lending products. We expect that, in part, this is due to consumers using credit to help make ends meet. For lenders, it is important that they continue to make credit available to consumers who may need it, but equally important that they are making prudent lending decisions and managing the risks of their own credit portfolios.”

Delinquencies (when consumers miss debt repayments or are late with their payments) have risen for most credit products over the past year, the TransUnion report shows. The serious delinquency rate (when a payment is 90 or more days overdue) for bank personal loans increased by 3.1 percentage points over the 12 months to stand at 24.8% at the end of March. In other words, one in four bank personal loans is in arrears by 90 days or more.

Of particular concern, the report says, is the continued increase in delinquencies for secured loans, including home loans and vehicle finance. This is the third consecutive quarter that home loan delinquencies have increased (up 0.6 percentage points to 4%), while vehicle finance delinquency rates also continue to climb (up 0.7 percentage points to 5.2%). This indicates that even consumers in the lower-risk credit tiers are not immune to the current economic climate, the report says.

The exception to the trend of rising delinquencies is credit cards, which saw serious delinquency rates actually improve (down 1.3 percentage points to 12.6%). This indicates that consumers may be prioritising their credit card repayments over repayments of other debt, including secured debt.

Williams says: “With inflation still well above average wage growth, real household incomes continue to fall. In light of this, we have seen consumers increasingly using credit possibly to finance day-to-day living expenses and are prioritising the payment of credit cards - a product they perceive to be of greater future utility.”

PERSONAL FINANCE