South Africans face a significant debt challenge, as highlighted by recent reports, including Eighty20, a consumer insights and data science firm.
The current financial strain is evident when comparing income growth to rising expenses, leading to a situation where many people find their money depleted before the end of the month.
Eighty20’s report examines instalment-to-income ratios, revealing a concerning trend in debt burdens.
Andrew Fulton, director at Eighty20, noted that financial institutions must adhere to the National Credit Act, which mandates a thorough assessment of a borrower’s ability to repay.
This involves calculating affordability by considering income, expenses, and existing debts to ensure that new loan repayments do not lead to excessive financial stress.
Key components of this assessment include gross monthly income, net monthly income, living expenses, current debt obligations, and the new loan repayment amount.
The goal is to ensure that disposable income can cover total monthly obligations.
Standard Bank suggests that if your debt-to-income ratio exceeds 43%, it’s advisable to explore ways to reduce debt.
Benay Sager from DebtBusters advises that a debt repayment to net income ratio over 30% indicates a risky financial position, and if it exceeds 40%, the financial situation may be unsustainable, according to the DebtBusters Money Stress Tracker.
While DebtBusters uses net income for its calculations, the most common approach is to divide total monthly debt payments by gross monthly income, which is income before taxes or deductions.
In South Africa, the debt-to-income ratio is notably high. Eighty20 estimates this ratio averages around 54% across the population, with the Middle-Class segment at 56% and the Heavy Hitters at 63%.
Eighty20 has illustrated typical income and debt scenarios for three segments: The Mass Credit Market, Middle-Class Workers, and Heavy Hitters.
Mass Credit Market
(earning less than R10,000 per month):
Middle-Class Workers:
Heavy Hitters:
Factors Contributing to High Debt-to-Income Ratios:
