As cost of living rises, so do informal loans

Annual survey confirms consumer stress but also highlights rise in funeral polices.

As cost of living rises, so do informal loans The recent FinScope SA report, which analyses how consumers are using financial products and services, has revealed a concerning trend around credit extension. It found that the number of people accessing informal loans has doubled in the last year, including individuals who already have existing loans through formal institutions.

Of the nearly 5 000 respondents who were interviewed face to face, 63% have some form of credit which is a three percentage point increase from last year. However, this increase was driven primarily by the uptake of informal loans, with the number of people saying they had informal loans rising from 7% in 2017 to 14% in 2018 – effectively a 100% increase. The number of people who have both formal and informal loans more than doubled, from 4% to 9%.

This is clearly an indication of financial stress and that individuals who were previously able to access formal loans are now being declined, either due to default or a result of unaffordability. These individuals are desperate enough to pay the higher lending fees typical of the informal market (mashonisas are known to charge interest rates as high as 50% per month).

These figures are supported by the recent TransUnion SA Consumer Credit Index Report which showed that the number of accounts in early default is on the rise for the first time in two years. Around 919 000 credit accounts have fallen into default soon after the loan was taken.

According to both the Finscope and TransUnion reports, rising fuel and energy costs, as well as rising commodity prices, has South African consumers under increasingly more pressure. In a desperate attempt to save, consumers cut vital products and services, like insurance, from their budgets, setting themselves up for financial disaster.

The Finscope survey found that people are spending more of their income on day-to-day expenses such as food, water, electricity and transport than they did in 2017. The respondents in the survey are spending around 85% of their income on basic needs and as a result have decreased their allocation to saving, insurance and medical aid.

Lack of education around funeral cover

Despite the decrease in the amount allocated to insurance and savings, funeral cover has seen an increase, with 56% of respondents having funeral cover compared to 52% last year.

Jabulani Khumalo, Senior Information & Research Specialist at FinMark Trust, which conducts the Finscope survey, says this increase could be attributed to new funeral products on the market such as those marketed by Capitec.

While these new products may be cost-effective solutions, Khumalo is concerned by the increase in the number of people holding multiple funeral cover policies.

“We are seeing this trend in the lower-income earners, rather than middle-income earners who tend to only have one policy,” says Khumalo who is concerned that having multiple funeral policies increases the cost of coverage, especially for lower-income earners who have less money to spare.

Khumalo says it could be a lack of financial education around the benefits of single policies, or a trust issue that drives this behaviour. He is also concerned about the amount of money that is being spent on funerals rather than other pressing community needs such as education and savings. He points out that about six million adults have used savings and credit to pay for funeral expenses, yet about 80% of these already have funeral policies. This alludes to a shortfall in the funeral cover being financed by credit or savings. This may be a driver for holding multiple funeral policies.

“We need to understand to what extent funeral cover is crowding out other insurance and savings objectives,” says Khumalo who adds that Finscope will be conducting a survey into the reasons people hold multiple policies as well as holding discussions around the cost of funerals.

Money tips

  • Another loan will not solve your problems. Speak to your existing creditors to restructure your loan. Create a proper budget and work out a repayment plan.
  • Assess your funeral cover and shop around. For every policy you have, you pay extra admin costs. Consolidation will save you money. There are many good products that provide cover for direct and extended family.

Some interesting facts from the FinScope survey

  • 23% of people are borrowing money for food
  • 26% are saving for a rainy day
  • 64% are tracking their expenses
  • 30% are using loyalty programmes
  • 8% of households with DSTV have downgraded to the Compact package compared to last year

This article first appeared in City Press.

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