Why it’s becoming harder to consolidate your debt

When someone's debt reaches a breaking point, one of the ways they can lighten the load is to ask their bank (or a new bank) for a consolidation loan.

Consolidating your debt means lumping together the various forms of credit you have (e.g. credit cards, student loan, car loan, etc.) into one loan with one interest rate that you pay only one fixed payment on every month. This is helpful if you have debt in several different places and can consolidate everything with one bank.

According to Scott Terrio, manager of consumer insolvency at Hoyes Michalos & Associates, Inc., two or three years ago, this was a relatively simple thing to do. Customers went into their existing bank — or maybe even into a new one — asking for their debts to be consolidated. Banks happily obliged. But Terrio says that this has gotten significantly more challenging in the past year. He now sees banks increasingly rejecting consolidation requests.

“It’s accelerated quite a bit, actually,” he says. “If I meet 50 people a week, it’s not uncommon that four of five of them — even as many as 10 — have tried the bank route. And they’re getting rejected.”

Banks are in “bunker mode”

If a bank turned you down recently for a consolidation loan, you can blame the economy.

Canadians are in a tight spot right now. Consumer insolvencies in Ontario are up 28.5% from last year. Nearly 60% of women are living paycheque to paycheque, and 39% of Canadians say they have no retirement savings. Plus, the average Canadian owes about $1.70 for every dollar they earn after taxes.

All this and more has given the Bank of Canada reason not to move the overnight interest rate in nearly a year, and in its last announcement, the bank warned that Canada’s slowing economy will be “increasingly tested” by global trade tensions.

In short, things are looking a little dicey right now — and the banks know this. They employ in-house economists to keep tabs on things like household debt numbers, insolvency rates, and the like.

Banks have a lot of levers they can pull when they want to retract a bit — and one of them is saying no to consolidations

“The credit cycle has turned,” explains Terrio. What does that mean, exactly? Well, for all the reasons mentioned above, it’s not exactly a great time to be lending people money right now.

“Banks know that Canadians are leveraged to death and that incomes have stagnated,” says Terrio. 

The top five reasons people are turned down for consolidation loans according to the Credit Counselling Society are: no collateral; debt payment troubles; not enough income; not enough credit history; or too much debt. In today’s climate, banks are probably seeing more and more people who aren’t very credit-worthy, which means they’re going to be stricter about their consolidation criteria because they know the chances of making that money back aren’t great. It’s just not a smart loan for them to make.

When this happens, says Terrio, “they go into a sort of bunker mode and start to pull whatever levers they can.”

“Banks have a lot of levers they can pull when they want to retract a bit — and one of them is saying no to consolidations.”

In fact, says Terrio, there could even be a top-down directive instructing banks to halt consolidations until economic conditions improve.

“You might get a memo from a lending VP saying we’re not doing anymore consolidations for a while. And that’s probably enough for a junior bank officer to say ‘well if you’re coming in for a consolidation, it better look good.’”

Last step before insolvency

Okay, so banks aren’t offering consolidations as frequently as they used to a few years ago. Why is this a big deal?

“That’s one less option for them,” he says. “And they don’t have many in the first place. Unless you can get your family to help you out with debt, at some point, you’re pulling the pin.”

Once the potential for consolidation disappears, the potential for bankruptcy can start to appear.

That said, Terrio doesn’t see consolidations as a perfect option, either. He’s skeptical of their ability to actually help people out of significant debt. 

Unless you can get your family to help you out with debt, at some point, you’re pulling the pin

“I see lots of people who did consolidate and then a year later, they’re in my office,” he says.

“Because all consolidating does for you is give you one payment. It doesn’t usually cut your principle; it doesn’t necessarily cut your interest. But you’re making one payment instead of three or four, which, for a lot of people, is a big stress reduction.”

And stress reduction is great, but debt reduction is the ultimate goal.

Using TD’s debt consolidation calculator, you can see how a consolidation loan for $30,000 would work. In order to be free of that debt by December 2022, you’d have to make monthly payments of $953.99, at 9% annual interest.

“You’re lucky if you’re paying less than before,” says Terrio. “If you were paying $1,200 a month for three different cards, you may be paying $1,000 or $900. But generally speaking, you’re not saving much. You’re just making your life a little less complicated.”

Consolidations could make a comeback

Banks won’t hold out forever, though. When economic factors start looking stronger, consolidations will probably be much easier to come by. They’re a great way for banks to recruit new business.

“When times are better, banks make good interest on consolidation loans,” says Terrio. “Especially if you’re transferring a balance. If you’re bringing me three RBC cards and I’m TD, well that’s a brand new customer, right?”

But the economy will need to regain some of its strength before banks will feel confident that borrowers can take on new debt and pay it back.

“Lending always makes sense if the interest is high enough and if the person can pay it back,” says Terrio. “But in times like this, when the banks start to get nervous, they start to look at everything a little more sideways.”