Relief for indebted consumers as repo rate stays the same

The decision to keep the repo rate unchanged means that deeply indebted consumers can breathe a huge sigh of relief, but it is also a little too late for many South Africans, according to debt experts.

South African Reserve Bank (Sarb) governor Lesetja Kganyago announced no change in the interest rate on Thursday. The repo rate, which is the interest rate at which the Sarb lends money to commercial banks, remains at 7%, while the cost of borrowing stays at 10.5%.

“The decision was not unexpected but that is was nonetheless good news," said Debt Rescue CEO Neil Roets in a statement.

“Although the bank did not focus on that specifically, I believe that unemployment and the sluggish growth of the economy were primary factors in their decision.”

Roets said the announcement coming immediately after the statement by Statistics South Africa that there had been a significant decrease in the number of civil summonses and civil judgements by some 22% compared with the same period last year was proof positive that debt counselling was working providing and equitable solution for both creditors and indebted consumers.

“It is way too early to start feeling optimistic about the economy and consumers are still in deep trouble and things are going to get worse when more of the price increases related to the prolonged drought kick in.”

He said the only way the economy can grow is through the expansion of the business and manufacturing sectors.

“Many business people – especially in the SME category - can barely cope with the interest rate at present and therefore are unable to expand their business activities.”

High interest rates and the sluggish economy, said Roets, has also played an important role in job losses.

The figures released by Statistics SA recently showed unemployment had accelerated sharply in the first three months of 2016 to 26.7%, from 24.5% in the fourth quarter of last year.

This indicated that 5.7-million people who were actively looking for jobs were unable to find any.

Roets said the economy was shedding jobs as companies struggled to operate in the low growth environment, while more people were entering the labour market to look for jobs.

Data from the South African Human Rights Commission (SAHRC) showed that, of 19 million credit active consumers in South Africa, over half had impaired credit records, three months plus in arrears.

More than 11 million of South Africa’s credit active consumers were described as over-indebted by the SAHRC.

In Roet's opinion, debt counselling remained the best way for consumers to manage their debt load by negotiating with creditors and paying off their debt in smaller instalments over a longer period of time.

“None of their assets may be attached by debt collectors while they are under debt review,” he said.

A little too late for many South Africans

The stable repo rate is good news, the knock on of the previous three consecutive increases appears to have already taken its toll, DebtBusters CEO Ian Wason said.

“Previous increases in the repo rate impacted all South Africans, but those with high levels of debt felt it most. South Africans with vehicle finance, home loans, personal loans, store accounts and any other debt linked to the prime lending rate, have already been paying more towards their debt this year.”

He said with the cost of food, electricity, fuel and the general cost of living on an upward trend, consumers have been struggling to manage and afford their monthly expenses.

"This and three repo rate increases (since November) has proven fatal for many that were living on the edge of over-indebtedness. Suddenly, purchasing basic food items such as bread or milk is a struggle, forcing them to seek alternate sources of temporary income; the quickest being applying for or using more credit to get by on a day to day basis.”

Wason said payday loans, which have come under a lot of criticism recently, have been providing consumers with a quick and convenient way to access cash.

"Unfortunately, very few are able to stop at one pay day loan. Once consumers start along the road of requesting multiple payday loans, month after month, they very quickly become caught in a difficult to get out of debt spiral,” he said.

Wason said warned consumers that are heavily reliant on credit that they must tighten their belts and find ways to pay down their debt.

Article courtesy of Fin24