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The (Surprising) Type Of Debt Payment SA Consumers Prioritise Over Others

Author: Jason Snyman
Date: 2019-02-17
A recent study - first of it's kind in South Africa - has revealed what type of debt obligations South African consumers regard as more important that others, and why. Throw conventional wisdom out of the window - the results may surprise you.

South Africans are no strangers to haphazard spending – as increasingly demonstrated over Black Friday weekends – and we’re certainly not afraid of making a little debt.

According to BankservAfrica’s purchasing statistics for December 2018, South African consumers spent R59 billion over the festive period – a 15% growth on the previous year’s R51 billion.

Here were some of the key findings:

  • There were a total of 105 million transactions;
  • 1 December appeared to be the highest spending day, followed by 21 December, 24 December and 14 December;
  • The highest number of successful transactions by one single individual was 659;
  • As it was the previous year, consumer spending was the highest in grocery stores, service stations, restaurants and other food stores;
  • Spending was largely reserved for affordable and essential household items, reflecting the spending pressure consumers have found themselves under thanks to a weakened economy. 

As it is in spending, the economic crunch has South Africans re-evaluating how they prioritise any debt they may have accrued.

Let’s take a look at the main types of debt South Africans are currently paying off and what’s most important to them.

What Types Of Debt Do South Africans Consider Most Important?

Last month, TransUnion – a leading global risk and information solutions provider – released the findings of a study believed to be the first of its kind in South Africa. The study revealed which debts South African consumers prioritise over others during periods of financial strain. 

The study looked at the payment behaviour of about 325 000 consumers, all of which had at least a credit card, a vehicle loan or a housing loan. 

The study – the goal of which is to help us better understand consumer thought process regarding debt obligations – tracked these people over a period of time to observe what would happen when they found themselves unable to meet all credit commitments. How would they prioritize what to pay and what to delay?

This is commonly referred to as the ‘payment hierarchy’ – a term used in consumer lending that refers to consumer priorities when burdened with different credit obligations. When we don’t have enough money to cover everything – how do we decide which obligations are most important, which to pay first and which, if any, not to pay at all. 

Conventional wisdom may suggest that the first type of credit we’re willing to skip a payment on would be a credit card. 

After all, skipping a credit card payment doesn’t put any important collateral at risk. You need your car to get around and make a living, and without a home to live in (being one of the biggest assets a person could own), you’re in a special kind of trouble. Therefore, one would think that a home loan would be our first priority when it comes to servicing our debt.

Surprisingly, the TransUnion study revealed that South Africans kick against conventional wisdom and commonly place their vehicle loan payments first and foremost, followed then by home loans and lastly, as expected, credit cards. 

Commenting on the findings, Carmen Williams, Director of Research and Consulting for TransUnion South Africa, said; 

It might feel counterintuitive that, for most struggling consumers, vehicle loans are prioritised over other prominent credit products such as mortgages.
However, there are a number of important factors to consider. It’s not always about protecting your home; it might be the size of the payment required, access to other forms of credit and even what you feel the perceived consequences might be. Consumers and lenders alike often have to wrestle with these problems, and our study looks to shed light on some of the difficult decisions consumers sometimes have to make.

Why Do We Prioritise One Payment Over Another?

While the aforementioned study is certainly of interest, it does not promote one type of debt servicing over another. It certainly does not promote skipping payments on any sort of debt, but instead, is merely meant to shed some light on the way we think and why we prioritize one type of debt over another. 

So, we can take the following key points from the TransUnion study:

South Africans will commonly service the debt on their credit cards last, largely due to lesser perceived consequences – such as losing your home or your vehicle;

Consumers prioritise vehicle loans over home loans, despite the threat of losing a greater asset, with the potential for greater, more disastrous consequences. 

This is largely due to the fact that vehicle loan payments, on average, are far lower when compared to housing loans. Prioritising the vehicle payment over the home loan would provide the consumer with better cash flow relief and enable them to meet other, smaller obligations. 

Also, the justification behind this may be that home rental presents a viable alternative to ownership, and the fact that public transport in South Africa leaves much to be desired.

The haste with which any perceived consequences may rush up to meet us is another factor to take into consideration. Vehicles are possessed relatively quickly after missing two to three payments, while finding yourself on the street after defaulting on home loan payments could take months – or even years – to happen. 

And lastly, we rationalise the vehicle prioritization over others because without a vehicle to get to work – or look for work – we stand far less of a chance of getting a grip on our debt. A vehicle may prove vital in preserving our source of income. 

The most common reasons for consumers missing their payments, after all, are due to unforeseen circumstances out of our control and significant life events, such as loss of employment, illness, divorce, etc. 

The choices we have to make are often difficult, but necessary to survival. 

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