If you were in a precarious financial position, which debts would you make your priority? Common debts for the average South African household include home loans, vehicle loans, personal loans, credit cards, overdrafts and store cards. But if you didn’t have the money to make all of your debt repayments, which would you skip?

A recent study looked at millions of debt repayments made by South African consumers to determine their priorities, and you might just find the responses they gave surprising.

The research

The credit reference agency TransUnion conducted a study that consisted of two groups. Group A, which was made up of individuals with a higher income, was assessed to see how they would prioritise vehicle finance, housing loans and credit card debt repayments. Group B, which was comprised of lower earners, was assessed for their attitude towards personal loans, credit card debt and store card debt.

Every individual in both group A and group B had to have all three financial products. The repayment of these debts was tracked over 12 months, with one or more missed payments regarded as delinquency.

Group A

In group A, two of the three debts were secured debts for high amounts, with the average house loan repayment R8,058 a month and the average car loan repayment a surprisingly high R5,716. While you might assume borrowers would prioritise their house loan repayments if they were being squeezed financially, there were actually more missed payments on home loans (2.56 percent) than vehicle loans (2.53 percent). Predictably, credit card payments were the first to be skipped with a delinquency rate of 8.27 percent.

Group B

Group B was studied for its attitude to unsecured debt. Unsecured debt can be anything from a personal loan from a lender like Wonga to an overdraft facility with a bank. In this case, the study looked at the repayments of personal loans, credit cards and store cards.

Again, it found that the priorities of consumers were not as expected. It was predicted that credit card payments would be missed the least because of their widespread use in daily transactions, with personal loans given the lowest priority because the money had already been received and spent. However, the results were the other way around.

The delinquency rate on personal loans was just 11.06 percent, rising to 14.49 percent for credit cards and 28.43 percent for store cards. It’s thought the reason for these results is the high prevalence of direct debits on personal loans, with the repayments taken automatically. There’s also the ‘light at the end of the tunnel’ effect, with personal loans typically repaid over relatively short terms.

The problems caused by missed payments

While delinquency rates were surprisingly high on some products, it’s important consumers are aware of the problems caused by missed payments. If you miss a payment on a secured or unsecured debt then there will be consequences. Missed payments will be recorded on your credit report, which will make it more difficult to access affordable finance in the future. If you miss two or more payments in arrears, you may also go into ‘default’, which will bring serious consequences. If you’re stressed financially, the advice is to contact your creditor immediately to ask for more time to make the repayment or potentially to restructure the debt.   

What are your debt repayment priorities and why? Please share your thoughts in the comments below.

Agnes Green