The financial crisis has brought a new phenomenon to the banking sector: debt consolidation loans. Banks report a growing demand for the product, which allows the borrower to combine a number of banking and nonbanking loans. “People are more careful and seek ways to lower their monthly debt payments,” said Monika Kubovcová, in charge of GE Money Bank’s retail loans department.
Three years ago, GE became the first Czech bank to offer debt consolidation loans. Now the bank registers consolidation loans worth CZK 17 billion. “The year-on-year demand has grown about 15%,” Kubovcová told E15. These loans make almost half of the total amount of consumer loans granted by the bank.
Raiffeisenbank also sees demand for debt consolidation loans growing sharply. “One-third of the total amount of consumer loans granted this year is debt consolidation loans,” spokesman Tomáš Kofroň said, adding that the bank has consolidated loans worth CZK 600 million since the beginning of the year. The year-on-year demand for such loans grew by 354%, he said, though the bank only began offering them last spring.
LBBW is another bank offering the product. Spokeswoman Martina Lambert said demand for consolidation loans is about the same as demand for consumer loans.
Among large banks, Komerční banka is the only one to offer debt consolidation loans. “Smaller players use these loans to increase their market share, while large banks do not need this kind of competition,” said one of the bankers.
“The problem is that clients are usually late with their debt consolidation requests; they come when their name has already appeared in the register of debtors because they haven’t met a payment term,” said Josef Kunčara, who heads the loan department at Komerční banka.
Debt consolidation requests will not be approved for delinquent clients. Česká spořitelna and UniCredit do not offer debt consolidation loans, but they can create them at clients’ request. Nor does Komerční banka promote the service. The idea behind debt consolidation is that the bank settles all of a client’s existing loans provided by other lenders, credit card debts and leasing. The client is then granted a new loan, which can be increased and offers extended repayment terms. In most cases the interest rate is lower. “We can lower clients’ monthly payments by up to 70% this way,” Kubovcová said. The bank judges clients’ ability to repay the loan as it does for other credit it extends; however, in this case the institution does not include existing debts. The disadvantage of consolidation loans is that, in the long run, clients may end up repaying much more than they’d originally borrowed.
