Brazil and its 81 million debtors: a country full of families drowning in debt

Signs that Brazil is a brutally unequal country are an everyday occurrence. This very week, the fact was unequivocally on display. While the percentage of indebted Brazilian families reached a new record at 80%, making its way into the electoral debate, the reaction of a judge to the fear of losing the extravagant privileges of the bureaucratic elite has left the public stunned. Not to mention, generated scandal. “Soon we won’t even be able to pay the bills,” complained the magistrate. Eva do Amaral Coelho, who is white, went even further: “Soon, judges will be like those civil servants working under slave-like conditions.” Last month, Coelho earned about $18,000 in salary and bonuses. Her fellow citizens know it thanks to Brazil’s transparency laws.

Eight of every 10 homes owe money, according to official numbers, be it to the bank or another financial institution, to a telephone company or electricity utility. Or perhaps, to a family member or friend.

Like so many others, 21-year-old Deborah Desa is struggling to pay for law school and make ends meet. She works as an intern at a law firm and also provides independent labor law consulting. And she knows all too well what it’s like to owe money on her credit card, she explained this Friday during a break from work in downtown São Paulo. “I had to negotiate a deal with the bank,” she says. The usual arrangement involves new payment terms and new interest charges in exchange for partial debt forgiveness.

Family debt has taken off in recent years, and has reached an unprecedented volume. A third of people’s salaries now go to pay off debts. The reason is a perfect storm of various factors. And the result translates into dramatic, and far from exceptional situations, like having to apply for a credit line to pay off existing debt.

It can also be summed up in a handful of chilling statistics: 81 million Brazilians are on the official list of debtors. Household indebtedness above $900 billion (equivalent to 35% of the country’s GDP, according to data from the Central Bank, compared with 29% in Colombia and 17% in Mexico).

This mass indebtedness is one of the reasons why strong macroeconomic trends aren’t translating into tangible benefits for most ordinary Brazilians. And that has the government of Luiz Inácio Lula da Silva on edge, less than six months before the presidential and parliamentary elections. It is true that unemployment is at historic lows (5.8%), average income has risen, and inflation was under control until Donald Trump and Benjamin Netanyahu decided to get embroiled in a war with Iran. But borrowing costs remain sky-high, with the official interest rate at 15% to keep inflation in check.

Emergencies throw a budget off track

Any emergency carries with it the risk of throwing a family’s budget into disarray, even for those with stable jobs — as 38-year-old Carlos Rocha knows all too well. The government employee explains that he had to take out what is known as a “payroll loan” (which the lender deducts directly from his paycheck) to pay for emergency surgery for his wife, 36-year-old freelance journalist Paola Carvalho. “It was very quick; once the checks were done, I had the money that same week,” says Rocha. The two of them are visiting São Paulo from Boa Vista, which is located near the Venezuelan border. Still, he notes, it’s a resource that should be used only in exceptional cases, “because you end up paying up to twice the amount you borrowed.”

Many in Brazil rely on credit cards to pay for groceries or basic bills. It’s common to pay for concert tickets or a pair of sneakers on installments. One store offers $360 Nike Airs in 10 interest-free payments. A sweet deal for impulse buyers. The entire system encourages installment payments through point-accumulation programs that offer all kinds of perks.

For President Lula and his administration, the fault for this monstrous debt that families have accumulated lies in how expensive this money turns out to be — and internet gambling. Brazil is a country where for decades, gambling was prohibited. But now “a casino has come into every house via mobile phone” said an exasperated Lula on a recent trip to Barcelona.

With a friendly appearance, betting’s initial attraction turns for many into addiction or a Russian roulette to quickly get the necessary money to pay a bill or loan. In no time at all, a person can find themselves trapped in a vicious circle that causes colossal damage to the precarious financial situation of millions of families.

The Ministry of Finance is in talks with banks and financial institutions to launch a comprehensive debt restructuring program. Lula already started one in 2023, shortly after returning to power, with a focus on those hit hardest by the pandemic. The government is confident that debt reductions could reach 90% of total debt.

Fast money, from necessity to impulse

The current debt level is the result of a disastrous perfect storm cause by a cocktail of high interest rates and digital betting, but also job insecurity, the digitalization of finance, easy access to credit, and a rising cost of living.

Some 60 million Brazilians have gained access to banking services over the past decade, thanks to the expansion of the internet, mobile phones and Pix, the popular internet payment method created by the Central Bank of Brazil. Buses that used to serve as mobile bank branches traveling between cities in the interior of the vast country now compete with cell phones. For many, it is the most convenient and affordable way to pay, receive money and apply for credit with a single click.

While understanding the fine print of many financial products is often a challenge even for the most financially savvy customers in almost every country, in Brazil, where large segments of the population are unfamiliar with the most basic concepts of personal finance, it is a monumental challenge.

Rewards programs with perks

Fernando, 23, works at a kiosk inside an appliance store that promises “instant cash.” His employer is Ágil, a financial institution that sells personal loans. “They range from 200 to 13,000 reals [$40 to $2,600], and you only start paying back after a grace period, with interest rates between 15% and 18%,” he says. He knows little about those who default on their loans; “the collections department handles that.”

At the store’s checkout, a sign lists the rules for getting a loyalty card. It promises discounts, interest-free 12-month payment plans and, the big draw: “automatic increase in your [credit] limit upon payment of your bills.”

Fernando admits that among the customers he has served since entering the financial industry, he estimates that only about a third have financial literacy. “Many take out loans out of necessity or on impulse, without being fully aware of the risk.” One of his roles, he adds, is to stay vigilant to prevent losses to the company from potential defaulters.

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