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SA youth warned they are in excess debt trap

Trying to make the numbers balance and pay bills.

Trying to make the numbers balance and pay bills.

Published Jun 19, 2022

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Johannesburg - It is an open secret that young South Africans may not be waving but drowning in a sea of so-called easy debt, which exposes their wonky management of their financial affairs.

A study by Eighty20, the Cape Town-based research and data analytics consultancy, shows that about 20% of the 1.2 million South Africans aged between 18 and 24 are credit-active.

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The report also reveals that student debt has risen to R16.5 billion as of March this year.

Sebastien Alexanderson, founder and debt counsellor at National Debt Advisor (NDA), has warned that as South Africans become increasingly reliant on credit to make ends meet, the spending priorities among the youth need to change.

Alexanderson said the NDA notes the seriousness of students transitioning to the workplace with a huge amount of debt owed before earning their first salary. The high loan repayment rates are making it difficult for young adults to earn money and save successfully, he said.

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“It’s important to educate people from a very young age about the pitfalls of credit agreements and for them to understand the different types of debt. This will lead to better decision-making in the long run,” he added.

Alexanderson explained that impulse purchases, lack of continued financial literacy, high interest rates and lack of management all contribute to higher debt among the youth. While South Africans may try to avoid financial institutions to borrow money, or spend a high credit card bill, creating a credit record to survive in this country is inevitable.

“The only real credit we have access to when we grow towards adulthood is store credit, from cellphone providers, or if you have any savings in any major banks. You have to start at the bottom when reaching adulthood, and for the youth that comes with a very high interest rate, unfortunately,” Alexanderson said.

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South Africans may not be familiar with the intricate terms and conditions of the two types of credit agreements that our banking systems use. These are called secured (home loans and vehicle financing) and unsecured debt (personal loans, retail credit, overdraft and credit card facilities).

The NDA found that adults who create unsecured agreements do it because they are entering the workplace or need to make purchases they may not normally be able to afford. Some get store credit to buy clothing or appliances. But when that credit runs out, instead of paying it off and closing the account, they would either find more (cheaper) store credit or get a personal loan.

“As individuals these days, we should know what we’re going to buy with the tough times we have. When you make impulse purchases or max out your store credit, it’s very hard to clear that with a 32% interest rate without dipping into your entire paycheck,” Alexanderson said.

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A debt index by DebtBusters, the Cape Town-based debt counselling and credit monitoring outfit, for the first quarter of 2022, indicated that South Africans have 31% less disposable income in comparison to figures they recorded in 2016. DebtBusters’ chief executive Benay Sager found that the increase in loans and the lack of salary increases have led to more South Africans, particularly men, seeking debt counselling services.

“The number of men enquiring about debt counselling has increased from 48% to 56% since 2016. In a society where debt isn’t readily discussed and many men may have avoided seeking help, this is encouraging,” said Sager.

The conversation around debt management has been a topic that the debt-counselling sector has been flagging as a concern for several years. First National Bank revealed in their own study that middle-income consumers were spending up to 80% of their monthly salary within five days of being paid.

Their statistics suggest that an average middle-income South African who earns between R180 000 and R500 000 a year, survives on only 20% of their monthly salary for longer than 20 days in a month. Additionally, on average, 30% of their income is spent on unsecured credit and 35% on secured credit.

“Young people should be encouraged to live within their means and need to be taught how to have better relationships with money to be able to build a secure future for themselves, and for our economy,’’ Alexanderson said.

“To create a future debt-savvy generation, it is critical that the youth are educated as early as possible about the long-term dangers of bad behaviour regarding debt.”

The NDA offers advice on how to better manage debt.

Make sure that you know what is reflected on your credit report. A credit record is a detailed, objective account of all your credit transactions that are used to determine the credit score. There is practically no use in applying for a loan if you have a credit report filled with judgments and bad payment history.

Make sure that you know the interest rate, the repayment term and monthly instalments of the new debt you are signing up for.

Make sure that you have credit life insurance in the case of death, disability or retrenchment.

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