South Africa’s well-developed financial system has provided better access to credit. While this supports economic growth, excessive household expansion can have unintended negative consequences, says Joseph Phiri, certified financial planner at Alexander Forbes.
Phiri said the debt to disposable income of South African households rose from less than 60% before 1994 to the current level of around 75%, which is above the long-term average of 70% according to the Bank. South African Reserve (SARB).
“This means that households spend three quarters of their take home pay on debt and only have a quarter of their pay to spend on everything else. It gets worse if interest rates go up and the cost of paying off debt goes up, ”he said.
Phiri said these figures exclude loans from informal credit sources such as loan sharks known as “Omashonisa”.
As the name suggests (killers or plumbers), predatory loans can wipe out all future household income and lead to unhealthy finances.
As these microfinance options are illegal in South Africa, there is no data available to show exposures and costs to households. They are, however, extremely expensive with monthly interest of up to 20-30% paid off with principal, he said.
Phiri said the cost of debt depends on the type of debt – there are two main categories:
- Secured credit – borrowing against an asset for home and auto loans;
- Unsecured credit – credit cards, personal loans and overdrafts.
“Secured credit is generally cheaper and closely tied to the prime rate. Unsecured credit attracts high interest rates but is easier to obtain.
“Avoid unsecured credit, which is often used for consumption and not for the purchase of durable goods,” said Phiri.
South Africa’s low savings rate stifles growth
In addition to the grim debt data, Phiri said various research reports also show South African household savings have declined over the years and are among the weakest in developing economies.
Data from SARB and Stats SA show that although disposable income has increased, the ratio of household savings to disposable income has been negative.
“Households save less because they have to pay for current expenses. It has a huge impact on retirement and reliance on government for welfare, ”said Phiri.
“Household savings are vital for planning for retirement, saving for rainy days, accumulating assets, saving for investments and paying off debts, as various economic studies prove. “
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