The credit taps are closing ... so SA is moving to unsecured lending

More than 6 million applications for credit were rejected in the second quarter of this year, according to the latest Consumer Credit Market Report. In comparison to the same period last year, the number of new credit transactions and facilities opened decreased by over 7%.

This is not because South Africans are managing their money better or weaning off their credit dependency – it is in fact the opposite. Although there was an increase in the number of applications, of the 11.3 million credit applications received 55% were turned down, mostly due to affordability, according to Ngoako Mabeba, manager: statistics and research at the National Credit Regulator.

Cowyk Fox, managing executive at Absa Everyday Banking, says the rejection rate is mainly a reflection of affordability constraints and impaired credit records. “Against the background of a strained macro environment, these two factors have been deteriorating this year. Essentially, South Africans have less disposable income and find it more difficult to cover debt repayments, which in turn influence their credit rating negatively. As a result, the decline rates increase, even if the underwriting criteria remain unchanged.”

The credit report reflected the deterioration of customers with healthy credit scores. In the second quarter of the year the number of consumers in good standing fell by 677 026 to 14.87 million of the 25.1 million credit active consumers. A customer in good standing is either up to date with their payments or only one or two payments behind.

When looking at the year-on-year figures, consumers with impaired credit records – in other words those who are three months or more behind or with adverse listings – increased by more than 2 million. There are now more than 10 million credit-active households that are indebted – effectively defaulting on one or more accounts.

The recent amendments to the National Credit Act allowing for the Debt Review Bill would also have an impact on new credit applications, especially for those earning R7 500 or less per month. With concerns that the Debt Relief Bill would result in these consumers having their debt expunged, many credit providers have cut back lending to this segment.

Despite the rejections, South African still managed to borrow an additional R134.7 billion between April and June this year. Households currently owe R1.9 trillion in debt – that is equivalent to the national budget. Mortgages make up the bulk at R900 billion, followed by asset-backed lending such as car finance at R435 billion.

What is concerning with this trend is that more lending is happening in the unsecured space.

Of the R134.7 billion of new credit that was granted from April to June last year, credit facilities, unsecured credit and short-term loans accounted for R52 billion, secured credit (vehicle finance) R41 billion and new mortgages only accounted for R40 billion.

Considering that mortgages are far higher value lending items, this shows that the vast majority of South Africans are borrowing for consumption-driven, short-term needs, rather than to create wealth through asset acquisition.

Despite having 25 million credit-active South Africans, there are only 1.7 million mortgages and 3.4 million secured credit. In theory, this suggests that double the number of people own a car instead of a home.

The number of credit facilities – this would include credit cards, overdrafts and store cards – makes up 26 million accounts and accounts for R249 billion of the debt. In comparison there are only 5.6 million unsecured loans making up R205.6 million of total debt.

Credit facilities are one of the worst culprits when it comes to over-indebtedness. A credit facility acts as a revolving credit line where there is no “paid off” date. This traps people into a cycle of living off credit indefinitely. Unsecured loans are easier to manage as they are fixed-term loans and tend to be more goal orientated.

When someone takes out a fixed-term loan, they have a clear idea of their monthly instalment and the date when the loan will be paid off.

Of concern is that people earning less than R10 000 account for more than 58% of credit facility accounts.

Christoph Nieuwoudt, CEO of FNB consumer segment, says the majority of credit facilities offered to the lower income clients is made up of store cards.

“Retailers have relatively high margins on clothing and can afford to take the risk of higher defaults,” he said.

In comparison this segment makes up only 35% of fixed-term, unsecured debt which is easier to manage.

If you are one of the 10 million South Africans facing the debt pinch, start by cutting those credit facilities and closing them.

If you must borrow money, rather select a loan with a specific time period so you know exactly how much the debt is costing you and when you will be debt free.

If incorrect information is displayed, you can dispute the information through one of the available credit bureaus – this is usually free. They can remove false claims from your record.

Quite often, debt consolidation, which is available at most institutions, is a good option for customers trying to manage debt smartly.

Avoiding first payment default is also very important. It is imperative that customers understand how to go about making a first payment on a new facility – many tend to forget about this – which can lead to a first payment default.

TransUnion Credit Bureau conducted research into our payment hierarchies –they wanted to understand in difficult financial times, which loans consumers would prioritise.

Conventional wisdom would suggest that we would stop paying our credit cards, then our cars and only in the most dire circumstances would we stop repaying our home loans. Yet their research found that consumers acted differently.

Although credit cards were the first payments to be skipped, consumers prioritised their car repayments over their home loans.

In some ways this is actually a rational decision. Firstly, a car repayment is usually lower than a mortgage one. So it could be easier to keep that instalment active. A car is very important in providing transport to work. The loss of a car could result in the loss of income.

Secondly, consumers also know that it takes much longer for a bank to repossess a house than it would their car.

Due to the speed at which a car devalues, a bank would initiate a repossession within a few months of non-payment.

But evicting someone from their home can take years to complete. And due to the growth nature of property value, it is easier to restructure your home loan than it would be for your vehicle payments.

Get in touch  City Press

+27 11 713 9001 news@citypress.co.za Media Park, 69 Kingsway Road, Auckland Park

Rise above the clutter | Choose your news | City Press in your inbox

City Press is an agenda-setting South African news brand that publishes across platforms. Its flagship print edition is distributed on a Sunday.