Recent reports indicate that a staggering 2.3 trillion individuals are currently facing debt, encompassing mortgages, car loans, personal loans, credit cards, and store cards. Over the past 16 years the number of consumers who have utilised credit in South Africa has doubled indicating a significant increase in access to credit facilities & more. Unfortunately, a third of these consumers are facing challenges in repaying their accounts. With the country’s economy facing instability due to fluctuating interest rates and inflation, consumers are finding it difficult to save, keep up with repayments, and prepare for unforeseen financial needs.

What Is A Consumer’s Debt-To-Income Ratio?

Your debt-to-income ratio is an important financial measure that compares your monthly debt payments to your income after deductions. This ratio shows how much strain your debt puts on your monthly budget, helping credit providers assess your ability to handle new debt responsibly. Ideally lenders look for a ratio of no more than 36% with lower percentages indicating a stronger financial position and a higher likelihood of approval for new credit.

Let’s take a look at Charlene and how DTI works based on her R15,000 income.

Charlene has used up all her income down to the last penny. While she covers her expenses and puts funds away for retirement, there isn’t a secure financial foundation for her yet.

Understanding the debt-to-income ratio is all about finding the right balance between what you owe and what you earn. It’s about making sure that when you get paid you can cover your expenses pay off your debts and still have some money left over. That is the essence of having a manageable DTI. Moreover, incorporating the 50/30/20 budget rule allows you to clearly assess your expenses and the funds designated for them while also determining the surplus amount you can set aside for savings whether it’s for emergencies, your child’s education or any future endeavours you may have in mind.

Economical Impacts On Debt-To-Income-Ratio

Rising inflation and interest rates not only affect the cost of living but also have a substantial impact on essential expenses such as fuel, rent, and electricity. Furthermore, the challenging economic conditions make it tough for families to save or afford necessities beyond food. As a result many families resort to credit to cover expenses leading to escalating debt.

The chart below displays the total consumer debt in the country, including mortgages, car loans, and store account loans.

How Can You Assess Your Level Of Risk By Analyzing Your Debt-To-Income Ratio?

Low Risk ➜ Between 0 – 29% 

Lenders typically recommend a DTI percentage between 0 and 29%, ensuring that you have enough funds left over after paying bills to save. This percentage reflects your affordability in the eyes of lenders.

Pro-tip; just because you have a variety of options for credit does not mean you have to take the debt. More debt might leave you with no money to save at the end.

Moderate Risk ➜ Between 40 – 49%

If your credit profile shows a percentage of 40% to 49%, it’s important to consider reducing your DTI to better manage any future financial challenges that may arise.

Pro tip; Make timely payments on debt and reduce luxury spending until you’re back on track.

High Risk ➜ Between 50 – 59%

Credit profiles between 50 and 59% lead to stricter lending terms from lenders, resulting in higher interest rates. This could potentially leave you with less money to save or handle unexpected expenses in life. This high-risk position can become very difficult to conquer and can result in a debt-cycle which only increases your DTI. 

Pro tip; you will need to settle all arrears that you may have. You can do this by contacting your credit provider and setting up a repayment plan. Alternatively, you can request assistance from a debt counsellor to assist you.

Very High Risk ➜ 60% & Above

Many Vantage clients turn to us when faced with closed financial doors due to credit denials and mounting missed payments. Our solution slashes debt repayment amounts from an overwhelming 70% down to a manageable 30% on average. This allows customers to save 40% of their income for priorities like savings or emergency funds.

Fix The Issue Before It’s Too Late

Taking on more debt can hinder meeting basic needs as most resources go towards repayment. Manage your debts wisely by paying them on time closing unnecessary accounts and making timely payments. Allocating 80% of your income towards debt repayment is unsustainable.

Missing payments can lead to a snowball effect especially with high-interest payday loans potentially doubling what you owe. This could force you to turn to risky options like loan sharks. Falling into a cycle of debt not only impacts you but also your family’s financial stability.

Seek Help From Professionals

As a certified debt counselor under the National Credit Regulator (NCR), we have the ability to negotiate reduced monthly payments and interest rates with your creditors. Our budget-friendly repayment options also allow us to lock in lower interest rates for up to 5 years. This can offer you and your family financial relief stability and peace of mind. By decreasing your monthly expenses you can effectively manage your debts and maintain financial stability in your household. 

Vantage empowers South Africans to imagine and achieve a better tomorrow by providing effective debt solutions to those who are experiencing debt. We offer a free financial assessment to find out what you qualify for and how we can save you money.