Consumer Proposal vs Debt Consolidation: Which is Better?

consumer proposal vs debt consolidation

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When it comes to consolidating their debts, more and more Canadians are turning to consumer proposals. A Consumer Proposal can be preferable to a debt consolidation loan for many people because of the lower monthly payments and greater leeway in how the debt is distributed. Read on to find out how Consumer Proposals stack out against more conventional consolidation loans, and why you might want to consider using one.

How Do Consumer Proposals Work?

A Consumer Proposal functions similarly to a debt consolidation loan – all of your debts will be rolled into one settlement and repaid over time. It is an alternative to debt consolidation loans, in which no new money is borrowed to pay off existing debt. More importantly, you can settle your debts for as little as you can manage to pay, with the rest being forgiven and written off by your creditors. It is possible to lower the total amount of debt you owe by as much as 80% through a Consumer Proposal, with no additional interest charges or administrative fees.

Difference Between a Consumer Proposal and a Debt Consolidation Loan

Consumer proposals aim to lower your overall debt load, while a consolidated loan aims to reduce your interest payments and consolidate your existing debts into one manageable payment. A consumer proposal consolidates all of your unsecured obligations into one monthly payment, while also wiping out interest and reducing the principal owed by as much as 75%. In contrast, debt consolidation entails obtaining a single large loan to settle several smaller ones. The key motivation for raising leverage is to reduce your interest rate. To provide just one example: if you go to a bank and borrow $5,000 on a credit card, you will be quoted a very high-interest rate. However, the interest rate on mortgages and other major loans backed by real estate is far lower. When you consolidate your debt, you borrow a large quantity of money to pay off several smaller loans that have higher interest rates. With a new loan and a considerably reduced interest rate, you can pay off your debt much more quickly.

The Pros and Cons of Consumer Proposals

First, we’ll discuss the benefits of a consumer suggestion for lowering debt, and then we’ll discuss the drawbacks. Here are the key advantages of a consumer proposal:
  • Debts owed can often be reduced through a consumer proposal
  • Consumer proposals stop collection actions
  • Wage garnishments are prevented by consumer proposals
  • The proposal is repaid with no interest
  • With no penalties, the proposal can be repaid faster
  • Insolvency trustees, who are officers of the court, handle consumer proposals, providing legal protection from creditors.
The biggest disadvantage with consumer proposals is that you will suffer a decline in your credit rating and your relationship with the creditor, as a result. As an added note, the consumer proposal will remain as an R7 on your credit record for three years after the balance is paid in full. This is a reasonable compromise if you have a substantial amount of outstanding debt. Having a high credit score is beneficial, but it won’t get you anywhere if you’re going to spend the next decade constantly trying to pay off your debts. It’s up to you to decide if improving your financial situation by negotiating a more manageable repayment arrangement with your creditors is worth the hit to your credit score.

The Pros and Cons of Debt Consolidation

Various people who are in need of debt relief prefer debt consolidation because of the many benefits it provides. The most compelling arguments in favor of a debt consolidation loan are:
  • Loan consolidations can be obtained against collateral, such as real estate
  • The total outstanding balance of your debt will be paid in full
  • Your credit score will not take a hit if you choose to discharge your debts
  • Your debt interest payments will go down
However, there are a number of reasons why debt consolidation might not be the answer to your financial struggles. Keep your high-interest credit cards and personal lines of credit if you get a consolidation loan. You risk increasing your debt to unmanageable levels if you keep utilizing those high-interest credit lines. Consolidation loans may be issued with the requirement of a cosigner or the pledge of a valuable asset. Your assets or your cosigner’s income may be taken away if you fail to make your monthly payments. Last but not least – if you enter a debt consolidation deal that you can’t pay, you’ll just be putting off creditor collection operations until a later date.

When Should You Go For a Consumer Proposal?

Consider submitting a consumer proposal instead of consolidating your debt if you fall into any of the following categories:
  • Your home has been encumbered with creditor liens
  • You just experienced company failure, and now your creditors are attempting to collect from you
  • Creditors keep on calling you
  • The Canada Revenue Agency (CRA) is making strong collection efforts on the large sum of money you owe them
  • You’re having trouble keeping up with your financial obligations
  • Creditors are taking money out of your paycheck
  • The proposed payment on a consolidation loan is too high
  • You’re starting to fall behind on mortgage, automobile, or other loan or credit card payments
  • The harm to your credit score is already extensive
  • All debts cannot be combined into one payment

When Should You Consider a Debt Consolidation?

It’s possible that a debt consolidation loan may be preferable to a consumer proposal if you have excellent enough credit to qualify for one, and can afford the monthly payments. In contrast to a consumer proposal, debt consolidation typically has no negative effect on credit scores. You are still making payments on your debt, but your repayment strategy now involves lower interest costs.

Find the Best Debt Management Option For You

Your debt solution should take into account both your income and your essential living expenses. A Licensed Insolvency Trustee is the best person to speak with since they will take the time to analyze your financial situation and advise you on the best course of action.  To schedule your no-cost initial consultation with Remolino & Associates, call us now at (416) 792-5599 or book an appointment online!

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