By Dr. Eugene Brink
There is no getting around this issue: South Africa is a debt-ridden society.
This fact is thrown into sharp relief in view of our alarmingly high unemployment of nearly 30% (close to 40% if the better expanded definition). This has led to the prestigious news magazine The Economist to draw a sombre conclusion in a bold headline in January 2018: “In South Africa, more people have loans than jobs”.
Some 25 million out of 37 million adult South Africans owe money to financial institutions or other corporate lenders. Only 10 million people in the country are formally employed. Emphatically, the National Credit Regulator (NCR) revealed that 58% of South Africans are struggling to pay off their credit cards.
Why is it that South Africa is such an indebted society? Firstly, South Africa is a highly prestige-driven society with everyone trying to keep up with the Bothas and Radebes, even if it means living beyond their means and lying awake at night on account of their debt. Secondly, due the poverty and unemployment in the country, many South Africans are incurring debt to simply make ends meet. “South Africans are borrowing for everyday needs,” says John Manyike, head of financial education for Old Mutual, insurance and investment firm.
But not all debt is equal and it is vital that everybody understands this – although relatively few people truly grasp this distinction. The categories broadly include good, bad and unavoidable debt. Once you comprehend the difference between the three, it is easier to properly take stock of your debt.
- The good
“Good” is usually not a word even remotely associated with debt, but there is indeed something like good debt.
In short, says Old Mutual, good debt is beneficial if it is used to fund appreciating assets. Examples of good debt include student loans. These types of investments will render a future return in terms of improved career prospects and a higher income.
“Good debt is used to generate long-term value that provides you with an asset at the end of your loan term and increases your net worth – in other words, it has some investment value,” explains Nkazi Sokhulu, CEO and co-founder of credit life insurance provider Yalu. “Getting a tertiary education is likely to secure you a higher future income as a skilled individual. If you’re in a position to obtain part-time work while studying, make a point of paying off as much as you can afford on your student loan each month.”
Financial experts and authors of Living Financially Carefree, Jaco Fouché and Jaco Barnard, define good debt as debt incurred to acquire income-generating assets – but adds a caveat. “This will only be worthwhile if the income (periodically and capital growth) to be generated is going to be more than the interest that will need to be paid.
“An example of good debt is when you purchase a property that you want to rent out. You probably don’t have the cash available upfront and will need to apply for a loan. You are incurring debt to purchase an income-generating asset. This can be classified a good debt.”The unavoidable
Despite many analysts and experts classifying your primary home loan as good debt, Fouché and Barnard correctly place this in the distinct “unavoidable” category. They further demystify this term by stating the following: “Unavoidable debt is the debt that you have to incur to be able to purchase necessary personal-use assets that you wouldn’t be able to afford without incurring debt.”
2. The unavoidable
According to them, two main items resort under this category, to wit a first vehicle and your primary home. “You have to buy a house at some stage and you need a vehicle.” You need a house to stay in (and renting indefinitely will leave you much poorer later in life) and you need a car to go to work and run your errands, such as picking up your kids from school.
However, they implore us to cut down on this debt over time because incurring more of it will stymie your financial freedom and leave you more indebted. Also, as opposed to good debt, these things are not income-generating assets but an expense.The bad
This is this type of debt that most of us are all-too-familiar with. Sokhulu says bad debt typically has high interest rates and is usually incurred to fulfil a want, rather than a real need. Moreover, it doesn’t leave you in a better position.
3. The bad
Old Mutual agrees that bad debt is detrimental to your wealth and is incurred in a number of ways. These include, but are not limited to, purchasing non-essential luxury items on your credit cards and opting to borrow money from non-financial institutions that have exorbitantly high interest rates. This list further includes clothing accounts, store cards and overdrafts.
Needless to say, this is the type of debt you should avoid as far as possible. Unfortunately, few heed this advice and get stuck in a debt quandary they cannot escape from.
Jaco Fouche and Jaco Barnard, 2018, “Living Financially Carefree”, Reach Publishers.
Fin24, 18 November 2018, “Is your debt good or bad? Here’s how to tell the difference”, https://www.fin24.com/Money/Debt/is-your-debt-good-or-bad-heres-how-to-tell-the-difference-20181118-3.
Old Mutual, 2018, “Good debt vs Bad debt”, https://oldmutualfinance.co.za/good-debt-bad-debt.
Zisanda Nkonkobe, 9 July 2018, “South Africans strangled by heavy debt”, https://www.dispatchlive.co.za/news/business/2018-07-08-south-africans-strangled-by-heavy-debt/.
The Economist, 18 January 2018, “In South Africa, more people have loans than jobs”, https://www.economist.com/middle-east-and-africa/2018/01/18/in-south-africa-more-people-have-loans-than-jobs.