Rise in prices and higher interest rates has everything to do with indebtedness. When usual income can’t deal with daily expenses people need to seek for another financial help, and that is how South Afrincans are entering into 2023.
Borrowing money, in itself, is not a bad thing. Actually, it can help us overcome situations or achieve some personal or family objectives. For example, it’s usual to get a personal credit to buy a car or enter into a mortgage in order to acquire the first house. Of course there’s a reasonable indebtedness level, and the problems begin when our income can’t face the debt paybacks.
Economic context can also influence this aspect, and that is what seems to happen to South Africans after a year characterized by the general increase in prices. At least that’s the conclusion of the Credit Stress Report for the 3th Q of 2022, developed by Eighty20, the analytics and research company, and the credit bureau XDS (Xpert Decision Systems).
This research, despite some positive numbers, makes us pay attention to some alarming shifts in the most credit-active customer segments. As said by Andrew Fulton, director at Eighty20, “…the credit market is looking relatively resilient despite continued inflation and rising interest rates. Overall, total defaulters are down 3% from the third quarter of 2021 and total overdue balances are down 12%. However, a more detailed view of the credit market is showing large pockets of customers that are facing significant financial distress”.
One of the main points highlighted by the report is the interest rates. Prime lending rate, for example, hit 10.5 per cent, which represents an increase of 3.25% over the last year. To illustrate the significance of those changes for personal finances let’s say that, on a R1.5 million home loan, it means a monthly repayment growth of more than R3,000.
Interest rates played a lead role at 2022, and its growth can continue over 2023 depending on the economic context. This is because the Central Bank uses them as a way to keep control of South African inflation, or at least tries to. How does it work? When inflation increases banks make rates higher so it will be more expensive for people to borrow money, then they would spend less and save more. This would reduce the demand for services and goods, lowering prices to be more competitive, and finally containing inflation.
In this context, the report shows that home loan and vehicle asset finance (VAF) customers in the middle-class workers segment are under pressure: a 20% rise has been registered for the total value of these loans moving into default. This is a typical sign of credit stress reflecting that worker’s incomes are not being able to support their lifestyles.
The Eighty20 director expressed concern about the average installment-to-income ratio: nowadays two-thirds of the average middle-class salary is assigned to servicing debt.
