Consumers are pushed into the debt spiral by payday loans

20 December 2013

South African debt levels remain high, as consumers are pushed further into the debt spiral by payday loans. Payday loans were originally designed for a small number of individuals in specific financial situations, however as the ability to take on credit at a reasonable interest rate becomes more difficult, attributable to credit providers tightening the taps on lending, consumers are exhausting the last of their loan options by taking out short-term, high-cost, smaller loans.

The poor implementation of credit regulatory and affordability checks has contributed to the rapid rise in the availability of payday loans.  Although the amount of unsecured credit granted to South African consumers decreased from R22.06 billion for June 2013 to R20.90 billion for September 2013, according to the Consumer Credit Market Report, Ian Wason comments, “from September 2013 to date, DebtBusters has seen an alarming 21% increase in the amount of unsecured credit accrued by clients, before they have successfully signed up for debt counselling, from one payday lender in particular.”

Payday loans are putting South African consumers in even further financial difficulty, as the high cost of lending and the short repayment terms, place pressure on consumer affordability.  The difficulty in paying off a payday loan persuades consumers to take out further credit to roll over their current loan, consequently leading consumers to spiral into far more debt than they can possibly ever repay. Ian Wason states “before signing up for debt counselling, the average DebtBusters client spends more than 100% of their net income servicing their debt, without taking into account their living expenses.” 

Ian Wason further states “the rapid emergence of payday loans has represented a significant trend in DebtBusters client financials. South African consumers are entering into DebtBusters debt counselling process with lower debt exposure though their average monthly debt repayment amounts have skyrocketed.”

Ian Wason says “over the past year, DebtBusters has seen a rapid rise in the amount of South African consumers seeking help with their debt problems, as more and more consumers are entering into the debt counselling process. Average monthly debt counselling applications have increased from an amount of 6000 to 10000 across the industry in the past year. DebtBusters alone has had an alarming 100% growth in the total debt counselling application rate year on year.”

Ian Wason goes on to say “over-indebted South African consumers need to act now before they are burdened with a bleaker financial future. The debt counselling process is the solution for consumers struggling to repay their payday loans, as the process allows for the extension of the debt repayment terms and the renegotiation of interest rates down to an average of 3%. In addition, credit provider fees are stripped, legal protection is granted and consistent support is provided. Consumers are enabled to take back the reins on their finances and subsequently afford to make their debt repayments.”

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