Consumer Proposal vs. Debt Consolidation Loan

Key Features of a Consumer Proposal and Debt Consolidation Loan


Let’s talk about Consumer Proposal First:

Impact on Amount Owing

  • With a debt consolidation loan, you do not reduce the total amount of money that you are required to pay. Instead, you hope to reduce the amount of interest. This means that, unless you are able to get a significantly lower interest rate, your financial position may not improve. If you had difficulty making your monthly payments in the past, you may still have these issues.
  • If you decide that you are filing a Consumer Proposal in Hamilton, the total debt that you owe is reduced. In many cases, it is reduced by up to 7 %. This gives you the opportunity to start rebuilding your financial life much earlier,

Interest Charges

  • Though the rate may be lower, you continue paying interest on a debt consolidation loan.
  • Interest charges stop as soon as a consumer proposal is accepted. In addition, no addition interest is charged.

Getting a Debt Consolidation Loan

  • For many individuals a consolidation loan can be difficult to get if your past credit history shows that you have missed debt payments in the past. Your credit report which will be reviewed by the debt consolidation loan company when you apply for the loan and they will consider a bad credit history as a strike against you.
  • This often means that you will not be able to get the lower interest rate that you are looking for.
  • In addition, the lender may require additional security such as a second mortgage over your house before the company will give you the loan. Unless you are confident in your ability to manage your debt payments, this could be a risky path to take.
  • In some cases, a family member may be required to co-sign your new debt consolidation loan, so they will be partially responsible for your debt if you default on the loan.

Legal Action

  • A new debt consolidation loan does not stop existing legal actions such as a wage garnishment. These actions only stop if you manage to reach a settlement with that individual creditor.
  • However, all legal actions cease as soon as you file a consumer proposal.
  • Wage garnishment stops under a consumer proposal and you will start to receive your full salary again.

Early Payment

  • A consumer proposal give you the ability to pay down your proposal easily and even to pay your proposal off in full without any penalty. Also, if you miss one payment due to an unforeseen circumstance, your proposal will still be in effect as long as you make up that payment at a later date.

Impact on your Credit Score

  • A debt consolidation loan has no impact on your credit score. However, like with all other loans, if you miss payments then this will be reflected on your record.
  • Your credit score will be affected when you file a consumer proposal.

What are Debt Consolidation Loans?

A Debt Consolidation Loan is when a person takes out a new loan that has a lower interest rate than the average interest rate of your current loans. The purpose of a debt consolidation loan is to replace the old loans with one new loan that has a lower interest and save money.

For example:

Loan Type Amount Owing Interest Rate Annual Interest
Store Card $ 6000 29% $ 1740
Credit Card $ 7000 20% $ 1400
Other loan $ 10000 12% $ 1200
      Total Existing $ 23000 $ 4340
New Loan $ 23000 14% $ 3220
Interest Savings $ 1120

As you can see, getting a debt consolidation that has an interest rate of 14% you would save $1120 in interest charges every year.

A debt consolidation loan works well for people who are confident that they will be able to make their payments each month. However, if there is a possibility that you will fall behind in your payments, this option may not be the best choice for you.

If you are in this situation, a consumer proposal may be a better solution for you due to the benefits and protection that a consumer proposal offers you.


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