South Africans strangled by heavy debt

The flexibility of being able to buy now and pay later is one of the major reasons why millions of South Africans find themselves drowning in debt.

According to the Reserve Bank, consumer debt currently stands at R1.7-trillion, with a study by the World Bank revealing that a whopping 25 million South African adults owe money to various financial institutions and corporate lenders.

Metropolitan Retail CEO Peter Tshiguvho said the combination of the recent VAT increase, the largest petrol price hike ever in South Africa and the increase in luxury goods excise duty will make repaying debts all the more difficult.

He highlights the five most common debt traps – credit card debt, store accounts, pay day loans, new car loans and hire purchase – and offers tools on how to avoid them.

According to Tshiguvho, credit cards are easy bait for the financially uneducated consumer, with banks often offering rewards such as holidays, cash back and vouchers to entice new clients.

The National Credit Regulator says 58% of South Africans are struggling to pay off their credit cards.

“Most credit card users start off with the very best intentions and try to repay their debt, but many end up paying a significant amount of interest simply to keep their heads above water,” he said.

“Before you sign up for a credit card, look at what you can afford and limit your monthly spending to less than that. Pay your debt in full every month and your credit card will become a useful financial tool for building a positive credit rating.”

Also with a view to enticing consumers, stores often offer massive discounts, special offers and vouchers to get people to sign up for and keep using their accounts – with payday loans becoming a quick-fix solution for many cash-strapped consumers.

Tshiguvho warned people to use the former strictly for essentials and to pay the loans back as quickly as possible.

“With back-to-school, Easter, seasonal changes, school dances and Christmas, pressure is constantly on consumers to shop more and put it on account. You need to ask yourself if the store card is necessary.

“If it is, use it wisely and buy only essentials with it. Otherwise, cut it up and use cash or other instruments to stay within your budget and avoid the trap.

“Cash-strapped South Africans are increasingly turning to payday loans as a quick solution for making ends meet if they run out of money before the end of the month, but unfortunately this noose starts tightening rapidly once a deadline is missed. Interest mounts and many consumers have to borrow to pay the interest, leaving the original debt unpaid.”

Tshiguvho said this avenue should be carefully explored before applying.

When it comes to car loans, many consumers are tempted to go for a new car, which exposes them to rampant debt. Tshiguvho advises using the head not the heart here.

“Analyse your needs. Secondhand vehicles can be good value for money with good warranties. With reasonable kilometres on the clock and good record-keeping, a five- to seven-year-old vehicle will provide great durability.”

Hire-purchase, once prevalent in the furniture and appliance industry, is now a popular means for financing car purchases. The downside is that interest rates tend to be higher than the prime overdraft rate.

“What’s more, as you are hiring the item until you are paid up, failure to pay could mean the item is repossessed and you lose all the money you paid so far.

“Defer your purchase until you have saved the money to pay in full. If that isn’t possible, get a professional to review the draft hire-purchase agreement before you sign. And make sure you can afford the repayments.”