75% of Revenue is used to pay back debts in South Africa

How much of South Africans’ Revenue are used to pay back debts? Keep on reading to find out. It’s a fact that Indebtedness is becoming a real issue for many South Africans. The truth is that, since the  Covid-19 pandemic, entrepreneurs and workers are facing a particularly difficult environment generated by fast growing inflation and rising interest rates.

How Much of South Africans’ Revenue are used to pay back debts?

Serving debts, whether from credit cards, personal or online loans or overdrafts, is becoming increasingly difficult for South African households. To understand this, it is important to know that the debt-to-income ratio may hit 75% by the end of this year. That’s a large chunk of South Africans’ revenue going towards debt (if you ask me).

The percentage increase draws attention considering that, before 1994, it was less than 60%, and it would get higher than the long-term average (70%) informed by the South African Reserve Bank (SARB).

But, what does this debt-to-income ratio really mean? Technically, it is the proportion of a household’s periodic earnings or revenue that goes toward paying debts (including principal, fees, taxes and even insurance premiums). So, according the reports, for every R100 a South African earns, R75 of them must be used for paying bills.

As explained by the certified financial planner at Alexander Forbes, Joseph Phiri, “this means that households spend three-quarters of their take-home pay on debt and only have a quarter of their salary to spend on everything else. This worsens if the interest rates increase and the cost of paying the debt rises”.

How would interest rates increase affect this situation?

The fact is that, for now, there are no projections that the situation will improve. Two elements from the South African economy specially affect household finances: inflation and interest rate increase.

When it comes to inflation, we could say that a broad increase in the prices of goods and services, has been a global phenomenon since the beginning of Covid-19 pandemic, on 2020, later accentuated by the war between Russia and Ukraine that has troubled the international supply chain of critical commodities, like wheat and crude oil.

South African inflation, in particular, has once again registered increases not seen for more than a decade. As stated in the information provided by the Department of Statistics South Africa (STATS SA), the CPI (Consumer Price Index), which measures the overall change in consumer prices of goods and services over time, increased at 7.8% in July 2022 up from 7.4% in June 2022.

This rise became the highest since May 2009, when inflation registered 8% and the economy was facing currency depreciation due to the global financial crisis.

At the same time, as a policy that tries to curb inflation, the Central Bank announced the biggest increase in interest rates for the last 20 years. Of course, it will impact citizen budgets, since loans and debts will necessarily get more expensive. This means that South Africans will have less revenue left to spend.

So, from one side, inflation reduces the available income margin, since even basic products prices increase, and from the other, paying debts will get harder considering the increment of interest rates.

In view of that, the best advice for this moment would be to draw up a budget with both income and expenses, to have a clear idea of your debt-to-income ratio before entering into another loan. This will give you more revenue to spend.

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