‘Tis the time to pay off debt and save

By Thabani Ndwandwe

Johannesburg – The low interest rate environment provides a significant opportunity for many South African households to pay off debt faster and increase savings.

With added pressure from the COVID-19 crisis, the average South African household remains over-indebted with negligible savings for the future.

The general lack of savings means that South Africans are mostly unprepared for economic shocks such as the COVID-19 crisis.

The silver lining, however, is that the pandemic prompted the SA Reserve Bank to reduce lending rates in order to support households and businesses, with benchmark rates having fallen by three percentage points this year. At 7%, the prime lending rate is at its lowest level since 1966.

Given the pressure on the economy and subdued inflation expectations, interest rates are likely to remain low for some time.

Standard Bank currently expects just one 25 basis point hike next year. This provides the perfect opportunity for households to restore their financial health – if they are in a position to do so.

The reality is that many cannot because the low-income segment of the market has been particularly hard hit by the national lockdown, sparking widespread job and income losses.

Individuals who have lost jobs or income are encouraged to protect their financial health by reaching out to their credit providers to establish if they have insurance and options are available for individual circumstances.

Many households, particularly in the middle-income segment, are well-placed to consolidate their finances.

Monthly income levels within the middle class have recovered faster than in other segments, Standard Bank’s account data show.

The segment is also showing a relatively low default rate on secured loans. At the start of the year, the prime rate was 10% and has since dropped to 7%.

A family with a R900 000 home loan and vehicle finance of R100 000 would be saving a massive R1 760 in interest payments a month, thanks to the deep rate reductions in 2020. This is a significant boost to disposable income.

With the festive season approaching, there’s naturally a temptation to spend more and consume those savings – even if year-end bonuses are reduced or withheld. This would be a lost opportunity.

Furthermore, the rising number of COVID-19 cases provide an extra reason to have a quieter-than-usual festive period.

SA’s economy simply cannot afford a second hard lockdown. Social distancing and mask-wearing are critical in slowing down the spread of the virus.

The unusually low interest rate environment provides an opportunity to pay off loans faster, start saving or to invest in a venture that could generate a future income such as starting a small business.

As the COVID-19 crisis has shown us, the future is uncertain. Households that manage debt prudently and set aside a portion of their disposable income each month are better placed to navigate financial emergencies or economic crises.

Ndwandwe is head of personal and business banking credit at Standard Bank.

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