Consumers relied heavily on unsecured loans and credit cards to make ends meet in the first quarter of the year while also paying off their secured loans faster.
The country’s banking industry continues to face new challenges in returning to pre-pandemic levels of activity amid rising risks of stagflation and high inflation combined with high unemployment and sluggish demand.
The knowledge of TransUnions Q1 2022 South Africa Industry Insights Report shows that consumers were increasingly interested in retail and other unsecured credit, such as credit cards and unsecured personal loans, as high inflationary pressures forced them to use credit to offset increases in the price of goods.
At the same time, secured lending products such as home and auto finance experienced the opposite, seeing fewer new loans and lower outstanding balances, with lower loan-to-value ratios and supply shortages in the auto industry.
Lender feedback also suggests that amid the three rate hikes between November 2021 and March 2022, some consumers may have considered reducing their monthly repayments by paying more than required per month to pay off their large debts.
ALSO READ: Shocking rise in inflation rate for May spells more trouble for consumers
Notable increase in new unsecured loans
The report showed a notable increase in new unsecured loans, but outstanding loan balances declined across all major consumer loan categories compared to the first quarter of 2021, with the exception of non-bank unsecured personal loans, which saw a modest 0.9% increase.
Outstanding balances often reflect consumer sentiment and related willingness to spend, and these results were further supported by the results of TransUnion’s Q1 Consumer Pulse Study over the same period.
This study showed that nearly a third of consumers (32%) experienced a drop in household income and looking ahead to the next three months, more than half (53%) said they plan to reduce their discretionary spending.
ALSO READ: Desperate grantees turn to credit as cost of living escalates
Consumers are trying to reduce secured loans
On the other hand, the study showed that for secured home and auto loans, new loans and balances declined, although the reasons for the decline in outstanding balances were different.
While outstanding balances for unsecured loans often reflect current purchasing activity, secured loan balances often reflect the consumer’s long-term planning due to significant repayments.
Evidence suggests that consumers are looking to reduce their financial obligations amid rising interest rates. The average loan amount decreased by -5.8% in the fourth quarter of 2021 due to an inflow of new loans for lower-value housing.
In the auto industry, the trend is for consumers to pay off vehicle financing loans earlier by selling “extra” vehicles as prices for high-quality used cars rise as used car price inflation has risen from 3.7% to 7.9%.
This recent decline in secured loan balances was also reflected in sentiment TransUnion Consumer Pulse study this suggested that nearly one in three (32%) consumers said they intend to pay off current debts faster.
“We still see a mixed picture of the recovery. The South African consumer credit market was still trending back to pre-pandemic activity levels when the shock of inflationary pressures related to the conflict in Eastern Europe hit,” said Lee Naik, CEO of TransUnion Africa.
ALSO READ: SA Consumers Still Overstretched
Long road to credit market recovery
He says while some sectors of our economy, like mining, have benefited from increased demand, overall consumer sentiment and disposable household incomes have been negatively impacted.
“Based on our latest insights, it is clear that the recovery in the South African consumer credit market will remain protracted and volatile.”
Despite a rebound in new loan growth across a number of key categories compared to the low levels of 2020, the number of consumers participating in the consumer credit market remained relatively flat, increasing by just 0.3% over the past year.
Evidence shows that growth in unsecured lending across multiple categories was focused on underperforming consumers. For credit cards, 68% of total lending in December 2021 was subprime and quite similar for bank personal loans (63% – up 9.4%) and non-bank personal loans (68% – broadly flat).
TransUnion expects a higher overall level for non-bank personal loans compared to bank personal loans, as this category has historically been tailored to meet the needs of higher-risk consumers.
ALSO READ: Consumers warned against falling into debt spiral
Increased demand for unsecured loans
“We are seeing growth in new business volume – particularly in credit card and personal loan products. In uncertain times, these products are in increasing demand as they can provide consumers with the much-needed liquidity to fund any cost increases for everyday necessities,” says Naik.
He warned that lenders need to be extra aware of this trend and use advanced analytical techniques to determine which consumers are likely to be resilient and able to continue making repayments.
Lender feedback also suggests that at least some of the positive changes in clothing accounts (down 290 basis points), retail revolving accounts (down 50 basis points) and installment loans (down 30 basis points) were not necessarily due to improved household finances, but rather to concerted ones Debt Collection Efforts by Lenders.
“With the ongoing global macroeconomic headwinds affecting South Africa, it is important that lenders and consumers remain vigilant. Rising inflation and interest rates, caused by the fallout from the Ukraine conflict and global supply shocks, have put additional pressure on an already strained consumer credit market, which was still recovering from the impact of the COVID-19 pandemic and flooding earlier in the year .
“Although we expect performance to continue to vary across product categories and consumer groups, lenders that continuously monitor their portfolio and adjust their lending strategies accordingly will be the ones who will be successful and best placed to meet consumer needs.”