Concerns looming as cost of living pressures rise. Photo / 123RF
Concerns looming as cost of living pressures rise. Photo / 123RF
Personal consumer debt has fallen sharply amid the Covid-19 pandemic but there are concerns about how borrowers will pay it back as cost of living pressures rise.
Reserve Bank figures show consumer debt fell from $15.14 billion in June 2020 to $13.3b in May this year.
Of that, bank consumerdebt has plummeted from $9.76b to $7.3b and non-bank consumer debt has risen from $5.37b to $6b.
Centrix managing director Keith McLaughlin believed the fall was driven by responsible lending legislation which tightened in recent years and by changes to credit reporting.
"Credit providers and lenders have a lot more information now to make better decisions. Whereas historically, we were just reporting defaults and they were at least 90 days behind."
But defaults and arrears were showing signs of tracking upwards.
"We were tracking right down but are starting to see a bit of a spike in auto loans, and personal loans went through a spike a month or so ago."
He said New Zealanders typically prioritised debt payments by paying for mortgage and car loans first.
Defaults or arrears were more likely on unsecured lending - in other words, credit cards.
"Someone who was paying it off in full every month might just pay the monthly minimum amount payable, which means they will be paying more out in interest because interest rates on cards are not cheap, which exacerbates the problem."
McLaughlin said at the moment, people appeared to be coping with living off what they earned.
But if costs continued to rise without income keeping pace, it put a squeeze on disposable income and ability to pay for debts.
"I don't think it has really hit them yet because a lot of the mortgages haven't been recalibrated at higher rates, but they know what is coming.
"That is why credit demand is softer. People are saying: I am not going to go out and buy that fridge now, I will just put up with the one I have got because of the uncertainty around what's going to happen in the next three to six months."
He urged borrowers to prioritise paying high-interest debt and talking to their lenders if they got into trouble.
Missing debt
There was still a hole in the data for buy now pay later debt, as the Reserve Bank did not collect any figures on that sector.
McLaughlin estimated there was now around $1b in total debt through buy now pay later operators.
Centrix chief executive Keith McLaughlin. Photo / Supplied
BNPL grew strongly in the early stages of the pandemic in 2020 when people were forced to shop online but has now slowed its growth, along with other types of lending.
"It did go through a bit of a growth phase. It came off a very low base. It does have a lot of people participating in it but the amounts of credit are very low. I don't think it makes a huge difference to the amount of debt New Zealanders have."
But there is a distinct trend for it to be used by younger people who are steering clear of credit cards.
McLaughlin said in the under-30 age group, 620,000 people had an active credit account and 54 per cent used buy now pay later.
Coming up - Every day this week we'll take a deeper dive into the debt levels of different sectors including housing, consumer, agriculture, business and Crown borrowing
