South Africans face a significant debt challenge, as highlighted by recent reports, including Eighty20, a consumer insights and data science firm.
The current financial strain is evident when comparing income growth to rising expenses, leading to a situation where many people find their money depleted before the end of the month.
Eighty20's report examines instalment-to-income ratios, revealing a concerning trend in debt burdens.
Andrew Fulton, director at Eighty20, noted that financial institutions must adhere to the National Credit Act, which mandates a thorough assessment of a borrower’s ability to repay.
This involves calculating affordability by considering income, expenses, and existing debts to ensure that new loan repayments do not lead to excessive financial stress.
Key components of this assessment include gross monthly income, net monthly income, living expenses, current debt obligations, and the new loan repayment amount.
The goal is to ensure that disposable income can cover total monthly obligations.
Standard Bank suggests that if your debt-to-income ratio exceeds 43%, it's advisable to explore ways to reduce debt.
Benay Sager from DebtBusters advises that a debt repayment to net income ratio over 30% indicates a risky financial position, and if it exceeds 40%, the financial situation may be unsustainable, according to the DebtBusters Money Stress Tracker.
While DebtBusters uses net income for its calculations, the most common approach is to divide total monthly debt payments by gross monthly income, which is income before taxes or deductions.
In South Africa, the debt-to-income ratio is notably high. Eighty20 estimates this ratio averages around 54% across the population, with the Middle-Class segment at 56% and the Heavy Hitters at 63%.
Eighty20 has illustrated typical income and debt scenarios for three segments: The Mass Credit Market, Middle-Class Workers, and Heavy Hitters.
Mass Credit Market (earning less than R10,000 per month):
This group primarily includes entry-level employees, such as nurses, teachers, and administrative staff. About 80% hold retail store accounts, and 17% have credit cards.
The average debt instalment-to-income ratio is approximately 30%, with a median ratio of around 16% for an individual earning R4,900 per month.
Middle-Class Workers:
Middle-class South Africans are grappling with unsustainable debt levels, spending approximately R7,000 each month on retail accounts, unsecured credit, and other debt forms like bonds or vehicle finance.
Eighty20, which aggregates data from 42 million South Africans representing over R3.7 trillion in annual earnings places the middle-class threshold at nearly R25,000 per month for households, with individual incomes around R16,000.
This segment comprises married couples aiming for a middle-class lifestyle, managing car and home loans along with education costs. They hold about 30% of all home and vehicle asset finance loans in South Africa. On average, this group allocates around 56% of their net income to debt repayments, with a typical median ratio closer to 53%.
Heavy Hitters:
The wealthiest South Africans, known as the Heavy Hitters, represent less than 10% of the population but hold a significant portion of vehicle and home loans.
For this analysis, a median monthly salary of R42,100 was used, with debt repayments accounting for 66% of net income.
Factors Contributing to High Debt-to-Income Ratios:
Higher Borrowing Costs: Interest rates have risen substantially since mid-2021, impacting primarily young, first-time home buyers.
High Cost of Living: Inflation has consistently exceeded the Reserve Bank’s upper limit, with food inflation averaging around 7.93% between 2020 and 2023.
Stagnant Salary Growth: DebtBusters reports a 47% decrease in purchasing power since 2016, indicating a more severe situation than general inflation rates suggest.
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