A major finding in a new analysis of FNB retail banking, says South Africa’s middle-income consumers (people who earn between R7,000 and R60,000 per month) spend an average of 25% of their take-home monthly income to pay interest accumulated on debt.
The analysis also points out that the reliance on debt is higher among consumers who have defaulted on three or more credit obligations in the last 18 months, with nearly 80% of monthly interest paid going towards servicing unsecured credit.
Unsecured debt vs. secured debt. What’s the difference?
Secured debt: Secured debt is a loan that is granted against an asset, usually a house or vehicle, which is used as collateral against the loan.
Unsecured debt: Unsecured debt, such as credit cards and personal loans, does not have the backing of assets to serve as collateral. If the borrower defaults, the credit providers have to implement legal action, which can be lengthy and expensive with no guarantee of success. This type of debt usually comes with a higher interest rate to ameliorate the risk of the loan.
If people have more unsecured debt in their portfolio, they are classified as “high risk” when applying for more credit. The types of consumers usually take on expensive forms of credit, from multiple providers and potentially at maximum interest rates.
How much of your salary can go towards debt?
If you went to a bank and asked for a loan, one of the first things they would want to know is what is your debt-to-income ratio. Banks believe that the amount of your monthly debt payments should be no higher than 36% of your gross monthly income. Ideally, it should be around 10%, but if it’s less than 20%, you’re still considered to be in pretty good shape. This means that the money you pay out every month for your home loan, including taxes and insurance, credit card payments, car and other loans should not be more than the 36% figure. Before you panic, remember that the calculation is on your gross income, not your take-home pay.
What should you do if more than 36% of your salary is going towards debt repayments?
If more than 36% of your take-home monthly income is going toward servicing your debt, it’s time to consider debt counselling. A qualified debt counsellor will review your current financial situation and start discussions with your creditors. Part of these negotiations will involve lowering your interest rate (by up to 60%) and extending your payment terms. Based on your income, your debt counsellor will then consolidate your repayment into a single monthly amount. Instead of paying multiple creditors every month, you’ll make a single payment which is automatically distributed to all your creditors.