Consumers are under growing financial stress

Consumer appetite for credit is up, but a concerning trend is that new loan default rates are increasing in most income categories. Rising interest rates and inflation are hitting middle-class consumers who have vehicle asset finance agreements and home loans particularly hard.

The “Eighty20/XDS Credit Stress Report” for the fourth quarter of 2022 reveals that despite continued inflation and rising interest rates, cash-strapped consumers are turning to credit to finance their lifestyles and purchases. The quarterly report highlights the impact of economic forces on South African consumers, with a particular focus on consumer credit behaviour.

There were 800,000 new entrants into the credit market in the last quarter of 2022, compared with 600,000 new entrants in the same quarter a year earlier. New entrants to the credit market took out a total of R9.3bn in new loans.

Of concern, however, is that a growing number of consumers who take out retail credit are not able to service their growing loan instalments in the current high interest rate environment. According to Eighty20, increased financial pressure takes time before it translates to higher default rates, the latter which is defined as more than 90 days in arrears.

Not surprisingly, consumers earning between R3,000 and R8,000 a month are becoming increasingly reliant on credit for their everyday purchases. The report says credit balances in this sector ballooned by R2.5bn this year, reflecting an increase of 23%, while 1.3-million credit card holders moved into default in the fourth quarter of 2022.

Some middle-class workers – those with an average personal income of about R15,000 a month – also need credit card debt to help fund their lifestyle. In this sector of the market, credit card debt is up 10% while the number of those newly in default has increased by 17%. The real concern, says the report, is how this segment of the market is struggling to meet the growing instalments on vehicle finance and home loans. New defaulters are up by 30% and 18% respectively.

The wealthiest 5% of the population are not immune from the credit stress, with 23.7% of in this sector now in credit default, compared with 2.5% in the third quarter. According to the report, there was an 18% increase in home loan balances going into default in the third quarter of 2022, followed by a further 24% increase in the fourth quarter.

The big take-out: Cash-strapped consumers are turning to credit, but many are defaulting on their repayments.