Consumer debt burden grows

‘WHILE Experian South Africa found that the rate of first-time consumer
credit defaults improved in quarter four (Q4) of last year, consumer debt
has increased to R1.81 trillion.

Experians Consumer Default Index (CDI) for the last quarter showed an
improvement, down from 4.68 in September 2020 to 4.07 in December
2020.

The index tracks the marginal default rate as it measures the sum of
first-time (accounts that have never) defaulted balances as a percentage of
the total sum of balances outstanding.

“The rate that people defaulted on their loans fell at the end of last year primarily due to a combination of the impact of payment holidays and lenders tightening their criteria.”

The reason for the decrease of first-time defaulters according to Experian was driven by the availability of payment holidays from lenders.

“A significant reduction in the volume of few accounts opened since the onset of the Covid-19 pandemic has also had an impact, with most lenders
tightening their lending criteria and new credit exposure.”

Chief decision analytics officer at Experian Africa Jaco van Jaarsveldt said despite some positive data, there had not been an overall improvement in the financial performance of the average South African consumer.

Levels of distress were expected to increase across all segments of the market as the effects of Covid-19 and a continuously deteriorating economy weigh on performance, he said.

“People should continue to manage their finances carefully to ensure that they can endure the uncertainty ahead, while lenders will need to use insights from data to make the best decisions on their customers,” said Van Jaarsveldt.

Experian said vehicle loans deteriorated from 3.26 in December 2019 to 4.42 on the index in December 2020, as well as personal loans which deteriorated from 9.08 to 9.81.

Debt Rescue chief executive Neil Roets agreed that the improvement seen was due to payment holidays granted to consumers who do not have a history of payment defaults.

Roets said if consumers were unable to pay after the payment holiday periods lapsed, there would be an increase in the payment defaults.

“The reality is that it is expected that there are still consumers experiencing
financial distress, with many hot having recovered fully, if at all, and this could likely lead to an increase in defaults in the future,” said Roets.

It was evident from an increase in defaults on personal loans, which some consumers use to cover some of their living expenses, that consumers were still facing distress, he said.

“It is now more critical for consumers to budget and to understand their financial circumstances,” he said.

A good place to start, according to Roets, was by looking at a few months’ bank statements to see where cuts could be made, such as reducing expenditure or stopping services that are no longer required.

“If a consumer is unable to cover the minimal debt instalments after budget changes have been made, it is important to immediately seek help from a professional debt counsellor,” said Roets.

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