South African consumers are battling to pay the instalments on their home loans and credit cards, according to a report, which again shows that high income consumers are finding it increasingly difficult to repay debt and continue to use their credit cards extensively.

According to the Experian Consumer Default Index for the fourth quarter of 2023, the default behaviours of South Africans deteriorated from 3.97 to 4.68, a relative change of 18%.

The index, which measures the rolling default behaviour of South African consumers with home loans, vehicle loans, personal loans, credit cards and retail loan accounts, also highlights that all product-specific index metrics changed for the worse in 2023 compared to 2022, with home loans and credit cards showing the most significant deterioration.

This suggests that mid-to-high affluence consumers, who typically qualify for these high-end credit products, are struggling to afford their monthly payments, Jaco van Jaarsveldt, Experian’s Head of Commercial Strategy and Innovation, says.

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Increasing pressure on higher-affluence consumers to pay for credit

In addition, the report reveals that the higher-affluence consumer groups were under increasing pressure to honour their debt commitments, leading to a surge in debt review applications.

“These findings have significant implications for financial institutions operating in South Africa. With an increased risk of defaults, particularly in home loans and credit cards, banks and other lenders may need to reassess their risk management strategies and lending criteria,” Van Jaarsveldt says.

 Inflation has remained within the target band of 3% to 6% of the South African Reserve Bank (Sarb) since June 2023 after 13 months of exceeding the target band. During this time, inflation reached a peak of 7.8% in July 2022. The December 2023 decrease in inflation coincided with a drop in food inflation, which was good news for the cash-strapped South African consumer base, Van Jaarsveldt says.

“One of the significant points regarding the cost of living has been the costs associated with electricity due to Eskom tariffs as well as alternative electricity sources such as generators and solar, which are becoming increasingly prevalent in the face of continued loadshedding.”

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Higher-for-longer interest rates makes it worse

In addition, higher-for-longer interest rates are taking their toll on credit active consumers. The prime lending rate has remained unchanged since 1 April 2023. Through sustained high interest rates, the Sarb aims to get inflation back to 4.5%.

“The rapid rate at which interest rates increased and have now been sustained for the last 10 months, has put immense strain on credit-active consumers, particularly those exposed to secured credit, such as homes and vehicles. Younger consumers who are relatively new to the credit world also felt the pressure while they have to navigate new territory through times of sustained high interest rate.”

Although market appetite remains very high, approval rates remain low. The appetite for consumer credit has shown an increase in the third quarter of 2023 according to data from the National Credit Regulator.

“The sustained high application levels suggest that consumers are looking for credit to cover the shortages in their cost-of-living expenses. Approval levels remain low at 31.1% in the latest data, which means that more than two-thirds of applications are rejected. This non-approval partly stems from consumers’ inability to afford additional credit commitments, considering the cost-of-living pressures consumers face,” Van Jaarsveldt says.

“We advise consumers to exercise caution in this challenging financial environment. It is more important now than ever before that consumers carefully consider their ability to repay before taking on additional credit and seek advice from financial institutions who granted the facilities if they find themselves struggling to meet their debt obligations.”