Impact of Economic trends on loan availability and affordability

As consumers and businesses grapple with rising prices and a weakening currency, understanding the prevailing economic climate becomes crucial, especially when making important financing decisions. So, how exactly has South Africa’s economy been faring recently, and what macroeconomic trends are impacting households?

South Africa incurred negative GDP growth of -1.4% in 2022, as per the African Development Bank, led by load-shedding disruptions, global supply chain issues, and high inflation eroding consumer purchasing power. Though some recovery was seen in the last quarter, boosted by mining and manufacturing, unemployment remains elevated at over 32.7% as of December 2022. [REF]

High living costs have been exacerbated by a softer rand, which declined by around 12% against the US dollar in 2022. Meanwhile, consumer inflation raced to a 13-year high of 7.8% in July 2022 due to high fuel, food, and utility prices before gradually moderating to 6.5% by December. The South African Reserve Bank has accordingly hiked interest rates multiple times, with the repo rate standing at 5% currently.

On the supply side, Eskom implemented over 7,100 hours of power cuts in the first nine months of 2022 alone, hampering economic activity. [REF] Infrastructure backlogs and policy uncertainty have also weighed on investment levels. All this has taken a toll on household incomes and affordability. So, how is this economic climate impacting access to loans and related terms? Let’s examine key trends.

Impact on Loan Availability

With the economy struggling and consumers under financial strain, banks have naturally become more guarded in their lending approach. Several have tightened their criteria to balance risk and profitability in the current environment.

For individual loans like personal loans and vehicle financing, qualifying thresholds around items like your minimum wage in South Africa, credit score, debt-service-coverage and loan-to-value ratios have been raised by various loan lenders in South Africa like Capitec, First National Bank, Nedbank and Absa. Many are also scaling back unsecured lending as delinquencies rise.

According to a DHL report, banks approved 38.5% fewer retail loans in the first half of 2022 relative to the prior-year period. Even for those with good credit, terms have become less favorable with shorter tenors and higher interest rates. This, of course, impacts affordability.

On the business side, access to funding is also tighter for entrepreneurs and small/medium firms, which account for over 70% of employment. Lenders have adopted a more cautious approach as weak demand, high costs, and policy uncertainty weigh on the outlook for riskier sectors.

While the larger corporates with strong cashflows and balance sheets are still able to access domestic markets, financing terms have become expensive due to rate increases. Many are increasingly tapping capital markets for longer-dated funding at relatively better rates.

All in all, tighter household budgets and challenging macro fundamentals have led to reduced risk appetite among lenders. Loans are simply harder to source, with qualification and affordability becoming bigger constraints in securing financing.

Impact on Interest Rates and Repayment Options

For loans that are approved, the cost of borrowing has risen substantially over the past year across all consumer loan products. Home, vehicle, and personal loan interest rates are now at multi-year highs, averaging between 9-13% after the SARB hiked its repo rate by 275 basis points.

Borrowers with variable loans have experienced even sharper increases in their monthly installments as their lending rates quickly adjusted upwards, impacting their debt-servicing capacity. Those with fixed loans obtained earlier are comparatively better insulated for now.

An adjustment many lenders have made in response is extending loan tenors to offset higher interest costs and keep monthly payments affordable for consumers. However, this results in customers paying more in total interest over the life of the loans.

Banks have also been encouraging customers to visit branches to potentially negotiate more flexiblesassa reapplication pending methods, like payment holidays and interest moratoriums if they’re facing short-term financial stress. Some are promoting settlement options as well.

While aimed at relief, extending tenors and settlements typically attracts pre-settlement penalties as well. Customers must consider all associated costs carefully to avoid sinking deeper into debt they can ill afford. Responsible alternatives may be seeking personal loans at more reasonable terms to pay off existing high-cost debt.

Impact on Loan Pricing Outlook

Given the above interlinked trends and challenges, the outlook for consumer loans remains clouded over the near-term. While upcoming interest rate decisions will influence pricing trends, the broader economy will have an equally important impact.

With inflation still above target and the SARB committed to anchoring expectations, interest rates look set to normalize gradually from current levels over 2023 rather than drop significantly even as hikes become more measured.

In such a scenario, bank funding costs will stay elevated, getting priced into lending rates. A rebound in credit demand is also still some time away, given weak income growth prospects.

Banks will focus on protecting NIMs (net interest margins) and managing margins of safety over loan books in the interim. This implies prime rates are unlikely to see a substantial decline from multi-year highs anytime soon without meaningful macroeconomic improvements.

On the other hand, a sharper economic downturn that dampens credit risk further could see a more aggressive easing cycle. But stabilization rather than a steep correction currently appears more likely. An uncertain elections outcome adds to volatility.

For now, customers are advised to factor in current market rates as their reference case to negotiate new personal or auto loans, with rebates only expected over the medium-term if demand improves coupled with encouraging GDP growth and inflation prints.

Navigating the Changing Environment

In sum, the current economic climate entailing high inflation, slower growth, and higher rates has undoubtedly made loans less accessible and more expensive for most South Africans. While external pressures are beyond individual control, certain steps can still optimize one’s options:

• Do your SAASA status check regularly to look out for requests regarding updated contact/bank details or means tests to avoid discontinuation of SASSA benefits.
• Monitor credit bureau reports closely for errors and disputes to maintain a positive profile, helping access better-priced loans.
• Where possible, consolidate high-cost consumer debt through lower-rate refinancing to ease monthly obligations and deleverage longer-term.
• Consider negotiating repayment holidays or settlements carefully with lenders only as a last resort to avoid penalties and debt traps.
• Continue practicing financial discipline through prudent spending, savings, and debt repayment within means to build resilience for tougher times.
• Research all available alternatives to loans, such as allied financing products, before committing, factoring in upsizing income via skills training over time.
• Finally, stay abreast of macroeconomic and interest rate developments through reliable resources to timely adjust financial plans accordingly.

With resilience and responsible strategies, consumers can optimize access to affordable, sustainable credit even in a testing macro period. This is key to long-term financial wellness.

Let’s Finish

As a leading online resource focused on empowering South Africans with financial literacy and guidance related to loans, grants, and welfare services, SASSA & Loans is dedicated to simplifying your journey. Beyond regular updates on the macroeconomic landscape and its implications, our tools and guides provide practical assistance at every step of applying for credit, government grants, and more.