Personal-Finance

As the cost of living rises, so do informal loans

2018-12-09 06:00

The recent FinScope SA report, which analyses how consumers are using financial products and services, has revealed a concerning trend around credit extension.

It found that the number of people accessing informal loans has doubled in the past year, including among individuals who already have existing loans through formal institutions.

Of the nearly 5 000 respondents who were interviewed, 63% have some form of credit, which is an increase of 3% from last year.

However, this increase was driven primarily by the uptake of informal loans, with the number of people saying they had informal loans rising from 7% last year to 14% this year – in effect a 100% increase.

The number of people who have both formal and informal loans grew from 4% to 9%, more than double the number last year.

This is clearly an indication of financial stress and that individuals who were previously able to access formal loans are now being declined, either due to default or as a result of unaffordability.

These individuals are desperate enough to pay the higher lending fees typical of the informal market (loan sharks are known to charge interest rates as high as 50% a month).

These figures are supported by the recent TransUnion SA Consumer Credit Index, which showed that the number of accounts in early default is on the rise for the first time in two years.

About 919 000 credit accounts fell into default soon after the loan was taken. According to the FinScope and TransUnion reports, the rising fuel and energy costs, as well as rising commodity prices have put South African consumers under increasing pressure.

In a desperate attempt to save, consumers cut vital products and services such as insurance from their budgets – setting themselves up for a financial disaster.

The FinScope survey found that people are spending more of their income on day-to-day expenses such as food, water, electricity and transport than they did last year.

The respondents in the survey are spending about 85% of their income on basic needs and, as a result, have decreased their allocation to savings, insurance and medical aid.

LACK OF EDUCATION AROUND FUNERAL COVER

Despite the decrease in the amount allocated to insurance and savings, funeral cover has increased, with 56% of respondents having funeral cover compared with 52% last year.

Jabulani Khumalo, senior information and research specialist at FinMark Trust, which conducted the FinScope survey, says this increase could be attributed to new funeral products on the market, such as those offered by Capitec.

While these new products may be cost-effective, Khumalo is concerned about the increase in the number of people who have multiple funeral policies.

“We are seeing this trend in the lower-income earners rather than middle-income earners, who tend to only have one policy,” says Khumalo

Having multiple funeral policies increases the cost of coverage, especially for lower-income earners, who have less money to spare.

Khumalo says it could be a lack of financial education around the benefit of a single policy or a trust issue that drives this behaviour.

He is also concerned about the amount of money that is being spent on funerals rather than other pressing community needs such as education and savings.

He points out that about 6 million adults have used their savings and credit facilities to pay for funerals expenses, despite about four out of five of them already having funeral cover, and this may be on reason people take out multiple funeral policies.

“We need to understand to what extent funeral cover is crowding out other insurance and savings objectives,” says Khumalo, who adds that FinScope will be conducting a survey into the reasons people hold multiple policies, and will hold discussions around the cost of funerals.

MONEY TIPS

. Another loan will not solve your problems. Speak to your existing creditors to restructure your loan. Create a proper budget and work out a repayment plan.

. Assess your funeral cover and shop around. For every policy you have, you pay extra admin costs. Consolidation will save you money. There are many good products that provide cover for direct and extended family members.

Read more on:

personal finance
loans
Read News24’s Comments Policy

24.com publishes all comments posted on articles provided that they adhere to our Comments Policy. Should you wish to report a comment for editorial review, please do so by clicking the 'Report Comment' button to the right of each comment.

Comment on this story
0 comments
Add your comment
Comment 0 characters remaining

May 19 2019