BRETT VAN ASWEGEN: Danger of being unable to service long-term debt grows

As a result of multiple interest-rate hikes and rising inflation, South Africans are finding it more difficult to service their debt, and ultimately make ends meet. 

Rising interest rates, along with the weak rand and higher cost of living, is putting strain on South Africans. This has had a severe knock-on effect on consumers who are already struggling financially, as they are obligated to pay more for their monthly instalments for credit products such as home loans, vehicle asset finance and long term personal loans. 

According to data published by the National Credit Regulator there is an increasing trend for lenders who offer unsecured personal loans to push up the maximum loan term they offer to consumers, to try to negate the effect of lower consumer affordability, thereby reducing the monthly instalment repayment.  

This means if borrowers apply for a loan over 60 months because they cannot afford the repayments, the lender instead pushes them towards repayment terms over 72 or even 84 months in some cases. 

This places borrowers at great risk and increases risk to the lender and ultimately to the stability of the credit ecosystem, as gauging risk over the long term in a volatile employment market such as that of SA is complex.  

Personal loans with repayment terms of more than five years now amount to more than 32% of unsecured loan credit agreements by rand value. The total for these five year-plus loans amounted to R37.4bn in 2022. 

Many consumers are pushed into a long-term debt trap with these multi-year loans, as often they are upsold on the value of loan they require. For example, a consumer applies for a R30,000 personal loan over 24 months to renovate their property, with a monthly instalment of R1,900. 

The lender then upsells them a R45,000 loan that is repayable over 72 months with a lower monthly instalment of R1, 600. However, the customer incurs a total repayable amount increase of 155% over a far longer period. This pushes the customers past what they need and creates a long term debt trap. 

Arrears rates 

As reported in the National Credit Regulator’s Consumer Credit Market Report for the fourth quarter of 2022, nonperforming unsecured loans — accounts more than 90 days in arrears — came in at 20.5%. This means about one in five open personal loan accounts are in 90 or more days arrears. This is up from a rate of 16% for the same measure five years ago. 

Compared to other credit sectors, unsecured long term lending is by far the worst performing. The short-term loan sector (loans of up to R8,000 over up to six months) saw nonperforming loans come in at 12.7% and credit facilities (credit cards and garage cards) at 10.7% for the same period.  

Adding even further pressure to the unsecured personal loan space is that 48% of the funded applicants across the unsecured personal loan sector earn less than R15,000 per month. This is at least R8,800 less than the latest figures on average income for SA published by Stats SA.

This means even marginal swings in the cost of living will have a material effect on those applicants who, although credit active, are at the most risk financially. 

Recommendations 

Borrowers must carefully consider why they are applying for a loan and ensure that the loan amount and term match the intended utility. Applying for a loan of 72 months to go on an extravagant holiday may seem like an attractive option, but consider that you will be paying for that week in the sun for the next six years.  

Monthly instalments may be less with longer term loans as they are spread out over a longer period, but the total amount to repay will be substantially higher because interest and fees are charged over a longer period.

Always look at the full cost of credit as well as the amount of instalments before taking up a personal loan. 

• Van Aswegen is CEO at Wonga.