Debt is a reality many Canadians face, and when it becomes overwhelming, finding the right solution to regain financial control is essential. Two common options that often arise are debt consolidation and consumer proposals. Both have their benefits and drawbacks, but which one is best for you? In this article, we explore debt consolidation vs consumer proposal in depth to help you make an informed decision.
What is debt consolidation?
Debt consolidation involves combining multiple high-interest debts into a single loan, usually with a lower interest rate. By doing this, you simplify your debt payments and often reduce the overall interest you’re paying.
How does debt consolidation work?
Debt consolidation works by combining multiple high-interest debts, such as credit cards or personal loans, into a single loan with a lower interest rate. There are a number of ways to consolidate your debts, but the most common option is to take out a debt consolidation loan. This simplifies your finances by giving you just one monthly payment to manage, potentially reducing the overall interest you pay. While debt consolidation doesn’t reduce the total amount you owe, it can make repayment more manageable and help improve your credit score if you make timely payments. Once your lender approves your loan, you use the funds you receive to pay off your high-interest debts in one go, and you then make monthly payments over an agreed time period to pay off your debt consolidation loan. Do note, however, that you typically need a good credit rating to qualify for a consolidation loan.
Pros of debt consolidation
Here are the primary advantages of taking on a debt consolidation loan:
- Simplified payments – instead of juggling multiple creditors and due dates, you make one monthly payment, which can reduce stress and minimize the risk of missed payments.
- Lower interest rates – with a debt consolidation loan, you may secure a lower interest rate than what you’re currently paying on credit cards or other debts, saving you money over time.
- Improved credit score – if you make timely payments, your credit score can gradually improve.
Cons of debt consolidation
On the other hand, here are some of the disadvantages of debt consolidation that you may wish to consider when it comes to debt consolidation vs consumer proposal:
- Qualification requirements – to be approved for a consolidation loan, you usually need good credit. If your credit score has already been affected by missed payments, getting approval can be challenging.
- No debt reduction – while you may benefit from lower interest rates, debt consolidation doesn’t reduce the principal amount of what you owe.
- Risk of re-borrowing – debt consolidation only works if you manage your finances carefully moving forward. There’s a risk that you may continue accumulating debt if your spending habits don’t change.
- Sometimes require a co-signer or an asset – consolidation loans are sometimes given on the condition that they need to be secured by either a major asset (like your home), or a co-signer. If you fail to make your payments, your asset might be seized, or your co-signer will need to make the payments on your behalf.
What is a consumer proposal?
A consumer proposal is a formal debt relief option administered by a Licensed Insolvency Trustee (LIT). It allows you to negotiate with your creditors to pay back a portion of what you owe over a set period – usually up to five years. Unlike bankruptcy, you are still responsible for some portion of your debts, but the repayment is reduced and spread out over manageable payments. At Spergel, we have a 99% acceptance rate on any consumer proposals that we file.
How does a consumer proposal work?
A consumer proposal is a legal agreement between you and your creditors, facilitated by a Licensed Insolvency Trustee. It allows you to settle your unsecured debts by paying back a portion of what you owe (sometimes as little as 20%), typically over a period of up to five years. Once the proposal is filed, interest stops accumulating, and creditors are legally required to stop collection efforts. If the majority of your creditors accept the proposal, all creditors are bound by its terms, allowing you to make affordable, fixed monthly payments while keeping your assets.
Pros of a consumer proposal
Here are the primary advantages of a consumer proposal for gaining debt relief:
- Reduction of total debt – a consumer proposal can reduce the overall amount you owe, sometimes by up to 80%. This makes it much more manageable than paying the full balance through a consolidation loan.
- Legal protection from creditors – once a consumer proposal is filed, a stay of proceedings is automatically generated. This means that creditors are legally required to stop harassing you, garnishing your wages, or taking other legal actions.
- No interest accumulation – unlike with debt consolidation, once your consumer proposal is accepted, interest on your outstanding debt stops accumulating.
- Keep your assets – in a consumer proposal, you retain control of your assets, unlike in bankruptcy, where certain assets might be seized.
Cons of a consumer proposal
On the other hand, the following considerations should be made when it comes to filing a consumer proposal:
- Impact on credit – a consumer proposal will negatively affect your credit score, and it remains on your credit report for up to six years after completion.
- Length of process – the process can take several years to complete, depending on the terms agreed with your creditors, although you can make early repayments if you’re able to.
- Limited to unsecured debt – consumer proposals only apply to unsecured debt, such as credit card debts and personal loans, but not to secured debts like mortgages or car loans.
What is the difference between a debt consolidation and a consumer proposal?
The key distinction between a consumer proposal and a consolidation loan is that a loan consolidates multiple debts into one payment with lower interest but doesn’t reduce the overall amount you owe. A consumer proposal, on the other hand, not only consolidates your unsecured debts into one manageable monthly payment but also stops interest charges and can reduce your total debt by up to 80%. If you’re unsure which option suits your unique financial circumstances, it is always best to consult a reputable Licensed Insolvency Trustee to determine the best path forward for you.
When is debt consolidation the best option?
If you think you can pay off your debts when they’re simplified and with potentially a reduced interest rate, debt consolidation might be the best option for you. It has the ability to take a number of different loans like high interest credit card debts and condense them into a lower interest secured loan that is backed by collateral, like your home. When considering a debt consolidation loan, you should carefully think about your long-term financial circumstances. For instance, can your debts be included in a consolidation loan? Will you be able to take on a new consolidation loan with your current credit score? Will you be able to afford a new loan’s monthly payments? These are all important considerations to make before committing to a debt consolidation loan.
When is a consumer proposal the best option?
If you don’t think you can repay all of your debt plus interest, a consumer proposal is likely a better choice than debt consolidation. It’s often a more preferential option than bankruptcy if you have a steady income and don’t want to lose your assets. Ultimately, it’s a good choice if you are facing insolvency or have a poor credit score that won’t enable you to take on a debt consolidation loan, if you need to reduce your debt, and if you want to be protected from creditor actions like collection calls, wage garnishments, and legal action.
Debt consolidation vs consumer proposal: which is best for you?
Choosing between debt consolidation and a consumer proposal depends on your unique financial situation.
- If you have a stable income and a relatively good credit score but are struggling with high-interest debt, debt consolidation may be the right option. It allows you to streamline payments and potentially save on interest without harming your credit score.
- If your debt load is unmanageable and you’re struggling to make even the minimum payments, a consumer proposal may be the better choice. While it affects your credit in the short term, it offers significant debt reduction, stops interest accumulation, and provides legal protection from creditors.
Debt consolidation vs consumer proposal: FAQs
Here are some of the most commonly asked questions we receive about choosing between debt consolidation vs consumer proposal:
Which is better, consumer proposal or debt consolidation?
The choice between a consumer proposal and debt consolidation depends on your unique financial situation. Debt consolidation is better if you have a manageable debt load, good credit, and want to reduce high-interest rates without affecting your credit score. A consumer proposal is a better option if your debt is overwhelming, as it reduces the total amount owed and stops interest accumulation, though it has a greater impact on your credit. Consulting a Licensed Insolvency Trustee can help you decide which is best for your specific needs.
Is it better to consolidate or settle debt?
Whether it’s better to consolidate or settle debt depends on your financial situation and goals. Debt consolidation is ideal if you can manage your debts but need lower interest rates and simplified payments, as it doesn’t reduce the amount owed. Debt settlement, on the other hand, is better if you’re struggling to repay your debts, as it allows you to negotiate with creditors to reduce the total amount you owe. However, settling debt can negatively impact your credit score. Weighing these options based on your financial standing can help you decide the best course of action.
What is the downside of a consumer proposal?
The downside of a consumer proposal is its impact on your credit score, as it remains on your credit report for up to six years after completion, making it harder to obtain new credit during that time. Additionally, while it reduces your overall debt, a consumer proposal typically takes several years to complete. It also only applies to unsecured debts, so secured debts like mortgages or car loans are not included. Lastly, if your creditors reject the proposal, you may need to explore other options like bankruptcy.
Do creditors usually accept consumer proposals?
Yes, creditors usually accept consumer proposals if they believe it offers a better return than other options, such as bankruptcy. A proposal must be accepted by the majority (in dollar value) of your creditors, and if it’s reasonable – meaning it offers a fair repayment plan based on your financial situation – creditors are often inclined to approve it. Once accepted by the majority, all creditors are legally bound by the terms of the proposal.
Both debt consolidation and consumer proposals offer a path toward financial stability, but they serve different purposes depending on the severity of your debt. If you’re unsure of the best route for your situation, seeking advice from a Licensed Insolvency Trustee can help you find the most appropriate solution. Take the first step toward a brighter financial future. Reach out to us here at Spergel today for a free consultation.