Taking on additional debt now should be avoided, in spite of the easing of COVID-19 lockdown restrictions and the opening-up of the South African economy.
Al Baraka Bank’s Credit Manager, Ebrahim Hoosen, has cautioned consumers about the risks associated with additional financial commitments, especially during the current economic climate.
The past year has proven a difficult period for people across the world, including South Africa, with many – consumers and businesses – facing challenges never before experienced as a result of the lockdown austerity measures.
Hoosen said: “During the initial level five lockdown, many consumers experienced job losses or an impact on their monthly earnings, which were either partially or completely affected as a consequence of reduced working hours, or salary cuts. Many lost their jobs altogether and, therefore, the ability to earn any income. This placed a great strain on consumers’ ability to meet monthly financial commitments. The situation has, of course, somewhat improved with level one lockdown status resulting in the economy opening-up again, businesses resuming trading and employees again taking up normal working hours.”
“However, the pandemic is far from being over. In the light of the current economic climate and in spite of somewhat improved economic conditions, consumers should avoid taking on additional debt, as this could be hugely detrimental to individuals should it become necessary that the country again return to higher levels of lockdown, which will most certainly affect consumers’ income levels once more.”
Many consumers are already heavily burdened with monthly property, vehicle, credit card and medical aid-related obligations, as well as facing day-to-day living expenses, such as food, water, electricity and transport.
“Financial commitments are placing great strain on consumers’ monthly earnings – especially those who are not yet again receiving their full salaries or, worse, those who have been unable to secure new employment since being retrenched. Additional debt at this time should be avoided at all costs, as this will lead to consumers facing added financial stress, should the levels of lockdown increase,” Hoosen cautioned.
He warned: “With present finance rates at their lowest levels for many years, it is very tempting to upgrade one’s motor vehicle or home. However, people need to be aware that rates on finance will not remain at the current low levels as economic conditions improve. An increase in rates can, for example, have a hugely significant impact on the monthly instalments on property finance.”
He said in many cases, consumers fail to factor-in possible increases in instalments when they take on additional finance.
“As a result, many consumers end up facing debt review because their monthly expenditure quickly outstrips their income and they find themselves unable to service their increased property finance instalment commitments and other debt to which they are committed.”
Another common form of debt that consumers find highly attractive is the credit card.
“Very often consumers use this form of debt until limits are reached and then request limit increases, paying only the minimum amount each month, meaning the debt never seems to reduce, as utilisation is greater than the repayments.” said Hoosen.
He also warned that the risk of taking on too much debt would also negatively impact a consumer’s credit rating with credit bureaus, should they skip payments.
“In these times of acute uncertainty, I would strongly advise people to exercise extreme caution when considering taking on more debt, especially in view of the unknowns surrounding the current COVID-19 pandemic, its duration, the development of an effective vaccine and an unemployment rate currently at an all-time high of 30,8%, with 6,5 million jobless.”