The increasingly easy availability of longer term credit is pushing an increasing number of individuals into spiralling debt, according to new data.
Long-term credit, more than any other form of lending, is the worst-performing category when it comes to repayments, government statistics show.
South Africa’s National Credit Regulator reveals that 20.5 per cent of long-term unsecured loans in the fourth quarter of 2022 were in arrears. That’s an increase of almost five per cent compared to the same period in 2017.
The Consumer Credit Market Report defines non-performing unsecured loans as those which are more than 90 days in arrears. The majority of these are home loans, car loans or personal loans.
The long-term loan data also compares unfavourably with the short-term loan category where 12.7 per cent in the same last quarter were under-performing. Similarly, only 10.7 per cent of credit cards loans were described as under-performing.
Volatile economic situation causing repayment problems
The reason so many people are struggling to pay back long-term loan debt is twofold. Not only is the total debt more expensive (because the loan is taken out over a longer period), but economic circumstances change – and not always for the better. For instance, it’s not only in South Africa that residents are feeling the pinch when it comes to paying for everyday essentials.
The problem is global. Having to pay more for food and petrol in recent months has put a strain on household budgets. At the same time utility costs have more than doubled. Money that would have been put towards paying off a loan is now, in many cases, put towards general living costs. At the same interest rates have risen repeatedly as government’s struggle to contain rising inflation.
Lenders upselling long-term loans
Long-term loan lenders aren’t helping. Many are encouraging householders to take out loans over a longer period (ie 84 or 72 months instead of 60) because it means lower monthly payments. On the surface that sounds a good idea. But when interest is calculated, the loan costs more. Not only that, but many consumers are being upsold loans. In other words, they are being offered loans which are higher in value than the sum they originally applied for.
A home loan of R30,000 over 24 months to renovate a property comes in at around R1,900 in monthly instalments. It’s not uncommon for a lender to attempt to upsell this to a R45,000 loan repayable over 72 months. That would bring in a lower monthly instalment of R1, 600. But, the total repayable amount (interest and fees) increases by 155 per cent – and over a much longer period.
CEO of short-term loan company Wonga Online, Brett van Aswegen urges borrowers to be cautious.
“Applying for a loan of 72 months to go on an extravagant holiday may seem like an attractive option,” he said. “But consider that you will be paying for that week in the sun for the next six years.”
Van Aswegen isn’t a fan of the fast and traditional ‘payday loan’ either. Instead, he advocates that the three to six month instalment loans Wonga offers its customers is by far the most sensible option.
He added: “Longer-term borrowing places those taking out the loan at great risk. It also increases the risk to the lender and ultimately to the stability of the credit ecosystem. This is because gauging risk over the long term in a volatile employment market such as that of South Africa is very complex.”
Last year the total value of personal loans with a repayment period of more than five years, was R37.4bn. Around 32 per cent of the country’s unsecured loan credit agreements now fall in to this category.
