Debt: the harsh reality of difficult times
Economists have long warned that South African consumers have an unhealthy relationship with debt and that rising debt levels are unsustainable. The situation has worsened in recent months, with the cost of living increasing at the fastest rate in several years.
The latest statistical report on summonses issued and judgments registered shows a new upward trend in civil debt cases.
According to the Statistics SA report, 46,869 debt-related civil cases were recorded in May 2022 – either summonses for unpaid debts or judgments against people defaulting on their obligations.
The sharp increase from 39,886 court cases in April is concerning, but even worse, the growing number of cases largely involves individuals rather than service providers and suppliers who take court action to obtain payment from a company.
The figures reveal that most subpoenas and judgments relate to the non-payment of professional services (such as doctors, dentists, lawyers, lawyers, auditors, accountants, architects, engineers and hospital services) or other services (including including payment for municipal services, plumbers, masons, mechanics, sheet metal workers and electricians).
Based on a survey of selected courts, Stats SA calculates that the number of cases related to non-payment for services rose from 9,463 in April to 11,881 in May.
In total, the courts issued 12,204 civil judgments for debts amounting to R311.4 million.
Most of the cases (nearly 29%) concerned loan repayment problems.
Read: Why you should check your credit report
Stats SA provides figures relating to individuals which give insight into the difficulties people face.
The total value of civil debt judgments against private persons increased by R67 million to nearly R255 million in May, from R188 million in April.
Another shocking figure is that the value of judgments involving debts related to rent payments by individuals nearly doubled in May, to R34 million (R17.7 million in April). This figure only reflects the 854 cases in which the courts heard the case and issued a judgment. There were still 787 summonses to appear in court.
Unfortunately, another database of people’s financial problems ran into trouble. The Stats SA report on liquidations and insolvencies noted that insolvency figures have not been available since September 2021 following a cyberattack on the Department of Justice and Constitutional Development.
Sebastien Alexanderson, founder and debt adviser at National Debt Advisors, says the reality is that millions of South Africans have too much debt – and the ‘addition’ to their debt has gotten worse over the past decade .
“Given the current economic turmoil and its consumer impact – rising oil prices and inflationary pressures – over-indebtedness will increasingly pose a significant threat to the financial well-being of South Africans,” he said. he declares.
Alexanderson cites statistics from VeriCred Credit Bureau, showing that outstanding debt in South Africa reached nearly 2.1 trillion rand at the end of June and that more than 717,000 people were subject to a Debt Review.
“This reality must be seen in the context of the fact that the average South African spends up to 75% of their disposable income to pay down their debt. This is above the long-term average of 70% as reported by the SA Reserve Bank.
“The household debt-to-income ratio in South Africa currently stands at 67% and is expected to reach 75% by the end of 2022. A good debt-to-income ratio is below 36%. Anything over 43% is considered too high and a sign of debt,” says Alexanderson.
“South Africans must be encouraged to find ways to live within their means – the inability to do so is at the heart of the problem.
“What starts with a small payment with a credit card, auto finance or store card can eventually lead to a debt-ridden war zone – often leaving you with little or even no money for household expenses” , he adds.
Pressure on consumers
One need only look at the latest inflation figures to appreciate the problem of rising costs and increased pressure on household finances. According to the recent Consumer Price Index survey by Stats SA, food prices rose 9% year-on-year, electricity 14.5% and fuel 45%.
Interest rate hikes – ironically to fight inflation – have added to the misery and will continue to do so over the next year.
Kondi Nkosi, SA country manager at asset manager Schroders, says interest rates have risen around the world.
“In the United States, the Federal Reserve has already raised rates twice* this year: by a quarter of a percentage point in March and by half a percentage point in May. They are now at 0.75% -1% in the US and 1% in the UK after the Bank of England, the UK’s central bank, raised rates four times since December 2021,” he says.
In South Africa, the Reserve Bank has accelerated its pace to normalize interest rates after the prolonged period of low rates, to help the economy recover from the ravages of the Covid-19 pandemic.
“Locally, South Africa’s interest rate is at its highest level in five years – on July 21, the Reserve Bank of South Africa announced that interest rates would rise by 75 basis points, bringing the repo rate to 5.5% and the prime rate to 9%. %,” says Nkosi.
“Rates are expected to continue to rise. Our economists at Schroders predict that rates in the US will hit 3% by the end of the year and in the UK they will hit 2.25% in the first quarter of 2023.”
She says it’s important to note that higher interest rates won’t have an immediate impact on inflation, because it takes time for the effect to trickle down to the economy, and that eventually, higher interest rates promote savings, because we will earn more interest on our savings.
Read: Control your personal debts
Alexanderson urges people to get their finances in order and get to the point where they can start saving, rather than just struggling to keep up with debt repayments.
His top tips for breaking the debt trap include:
- Avoid using credit. One of the first signs that your debt situation is spiraling out of control is when you start to feel like you have to rely on more debt each month just to get through the month. When this happens, it’s time to reevaluate your living expenses and look for ways to live more frugally without incurring any new debt.
- Buy what you can afford, not what you can borrow. Creditors could lure you into crippling debt by offering you very attractive credit products that are just at the edge of your affordability scale.
- Start making a habit of saving. The importance of building up an emergency fund for unforeseen expenses cannot be stressed enough. Not having a savings plan for emergencies often forces people to take out loans when rainy days come.
In fact, it looks like the rainy days are here.
*Note that the US Federal Reserve raised interest rates by 75 basis points on Wednesday.
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