Thousands of South Africans are living beyond their means and racking up debt amid rising costs of living, said Sebastien Alexanderson, founder of National Debt Advisors.
“Debt addiction” has worsened over the past decade and combined with the current economic turbulence and inflationary pressures – over-indebtedness is likely to pose a risk to the financial health of many South Africans, Alexanderson said.
Recent data from the Veri Cred Credit Bureau (VCCB) showed that outstanding debt at the end of the second quarter of 2021 was about R2 trillion, with 717,495 people under debt assessment, he said.
“The average South African spends up to 75% of their disposable income on debt repayments – a 5% increase from the long-term average of 70% as reported by the South African Reserve Bank.”
The SARB’s Monetary Policy Committee recently raised the repurchase rate (repo) rate by 75 basis points, putting further pressure on consumers, with economists warning that belts should be tightened even more.
Alexanderson said the debt-to-income ratio of households currently stands at 67% and is expected to reach 75% by the end of 2022, according to expectations from global macro models and analysts.
“Generally, a good debt-to-income ratio is slightly less than or equal to 36%. Any ratio above 43% is considered too high and a sign of debt.”
Alexanderson said that to fight rising debt, consumers must live within their means.
National Debt Advisers suggested the following signs could indicate debt addiction within households:
- Spend more than 30% (or 50%) of their gross monthly income on total loan repayments (secured and unsecured);
- More than two months in arrears on a household credit commitment or account;
- Having four or more credit obligations; and,
- When spending the total repayment of loans, the consumer falls below the poverty line.
Alexanderson gave the following tips for breaking the debt trap:
- Avoid using credit: One of the first signs that your debt situation is spiraling out of control is when you feel like you have to rely on taking on more debt every month just to get through the month. When this happens, it’s time to re-evaluate your cost of living and look at ways to live more frugally by not taking on new debt.
- Buy what you can afford, not what you can borrow: This sentence may sound simple, but as the unwritten rules of the debt trap would have it, it really isn’t. One of the devious ways creditors can lure you into overwhelming debt is by offering you highly attractive credit products that fall right on the edge of your affordability scale.
- Make it a habit to save: The importance of building an emergency fund for unplanned expenses cannot be overemphasized. The lack of an emergency savings plan often requires people to take out loans when the rainy days come.
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