Interest rates

Rising interest rates and inflation add to the pressure facing South African consumers

Rising interest rates and rising inflation squeeze South African consumers between the proverbial rock and hard place, as the cost of servicing debt rises while the purchasing power of their money declines .

Benay Sager, president of the National Debt Counselors’ Association, said consumers’ disposable income had fallen by a quarter since 2016 when the cumulative effect of inflation over six years was taken into account.

Data from members of the National Debt Counsellors’ Association shows that consumers are borrowing to make up for the shortfall.

Rising inflation will exacerbate pressures on consumers as the cost of debt rises and take home pay no longer stretches as much as before. For consumers who have expensive debt (with high interest rates), debt counseling is a good option to explore,” Sager said.

Official CPI figures stood at 4.48%, near the upper end of South Africa’s target range, from a low of 3.27% in 2020. However, electricity and fuel should both increase astronomically, which will have a ripple effect. on other goods and services and accentuate upward inflationary pressures.

“Over the past six years, the trend has been that the size of loans has increased, while the number of credit agreements has decreased. This means that consumers are borrowing more by agreement and reaching the point where they are no longer eligible for debt sooner. In an environment of rising interest rates and inflation, we expect this to intensify,” Sager said.

He argued that there is a positive side to the situation, namely that people in debt are now starting to seek help sooner.

All of our members have reported that more and more people are actively seeking help before things get too serious. This is certainly partly due to reduced borrowing capacity, but our members are also working tirelessly to highlight the significant benefits that come with debt advice, especially in a higher interest rate environment. .

As part of debt counseling, interest rates on unsecured debt can be reduced from an average of 20% and more to 1-2%. This allows consumers to pay off costly high-interest debt more quickly.

Debt counseling has other important benefits. These include:
• Consumer assets, such as homes and vehicles, are legally protected.
• Consumers repay on their debts what they can really afford.
• Rather than having to deal with many creditors, they only deal with one person, the debt advisor, who renegotiates all the debt.
• By renegotiating the debt repayment term and interest rates, monthly repayments are reduced.

Sager warns that while debt counseling has many benefits and in South Africa it is efficient, well run and highly regulated, consumers need to understand that it is not an instant fix .

Debt counseling is a long-term commitment, not an easy fix. Just as it takes time to accumulate debt, it also takes time to reduce it. The important thing is to keep making regular payments and, if your situation improves, pay more to speed up the process.

While receiving debt counseling, consumers are not eligible for additional credit. This is a valid trade-off, as the consumer is expected to demonstrate that they can manage their existing debt in the first place.

For consumers who seek debt counselling, it is essential to let their debt counselor know if their financial situation changes, for better or for worse. Once a consumer has repaid their unsecured debt (and is current on their bond repayments, if any), a clearance certificate is issued through the approval of the national regulator of the credit, and the consumer can become credit active again.

Sager warns, however, that there are unscrupulous companies trying to take advantage of impatient consumers who follow debt counseling and offer ‘debt review removal services’. This is in violation of national credit law and consumers who are tempted could lose the creditor protection that debt counseling provides.

Debt counseling has many benefits, but consumers need to understand that it is a commitment, not an instant fix. For people who stick to the plan and make their monthly payments, it works, and the vast majority never fall back into unsustainable debt again.