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The Differences Between A Consumer Proposal Vs Debt Consolidation

Two common options for settling debts are consumer proposals and debt consolidation. Before deciding, it’s important to understand both strategies, so you know the one that aligns with your financial goals.

Understanding Consumer Proposals

A consumer proposal is a debt reduction solution that potentially decreases the amount that you owe and lengthens the terms of your repayment. It’s a legal process that involves the court, and you can get the help of a Licensed Insolvency Trustee (LIT). 

The LIT will determine how much of your debt you can pay and develop a plan that will work for you and your creditors. Consumer proposals lead to you repaying only a portion of your original outstanding balance within a term of five years or less but will stay on record for a significant amount of time.  

How does a consumer proposal affect credit score? 

Consumer proposals will show on your credit report as the code R7, which means your debt was settled rather than fully repaid. Because an R7 is considered a poor credit rating, getting approved for new loans or credit cards will be challenging in the future as several years of good credit history are required to “eliminate” the consumer proposal from the individual’s credit history.

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How A Consumer Proposal Works 

Getting a consumer proposal involves a specific legal process but can be broken down into a few steps.  

  1. Start your file—the first step to a consumer proposal involves meeting with an LIT to provide all your assets and debts, attending counselling sessions, and meeting with creditors if necessary. Meanwhile, your LIT will file the proposal with the Office of the Superintendent of Bankruptcy (OSB)
  2. Stop payments to unsecured creditors—all actions against you will be stopped, including garnishing your wages or lawsuits. Your Licensed Insolvency Trustee will propose payment changes and explain your situation to creditors. 
  3. Pay LIT according to the proposal—the creditors have 45 days to decide if they accept the proposal. If they accept, you focus on providing payments to your LIT, who is responsible for distributing the money.  

A consumer proposal allows for a maximum of three missed payments. More than that could result in the proposal being cancelled. Likewise, getting an annulment will make getting another proposal more challenging, so it’s important to be diligent with your payments.  

What Is Debt Consolidation?

Consolidating your debt means receiving a deposit of money and distributing it towards your multiple financial obligations, which sometimes results in several monthly payments. Some financial obligations include credit card debt, mortgages, student loans, or vehicle financing.  

Debt consolidation aims to simplify your financial management by providing you with enough funding to satisfy your current outstanding balances, regardless of whether it’s unsecured or secured debt. You’re then left with one monthly payment with an interest rate lower than the combined interest of multiple loans. 

How Debt Consolidation Works 

Getting a debt consolidation loan is simple and different from other loan processes because it doesn’t involve any legal measures.  

  1. Apply for the loan—each lender will have their own eligibility criteria and unique offers. Additionally, be sure to borrow only what you need, even if you qualify for more.  
  2. Satisfy your existing debts—although your debt amount owing stays the same, you’ll have fewer payments, pay a lower rate of interest and, potentially a lower monthly payment obligation. Credit bureaus will also see you’re taking steps to improve your financial obligations and reflect it on your credit score.  
  3. Repay the consolidation loan—you focus on one loan, and you can also restructure your budget to prevent challenging debt amounts from occurring again.  

The consolidation loan terms depend on your agreement with your lender, but they’ll work with you to find something that accommodates your circumstances.

Are Debt Consolidation And Consumer Proposals The Same?

Consumer proposals can involve debt consolidation strategies, but they are distinct experiences when repaying your debt. One main difference they have is that consumer proposals can reduce the amount you owe while the amount stays the same with debt consolidation. 

Even though debt consolidation doesn’t reduce the total amount due, it can protect your credit rating and even help you raise your credit score. You might also be able to save money by paying less interest payments when you take a loan with a lower interest rate. 

Comparing Advantages And Disadvantages 

Both consumer proposals and loans for consolidating debt can have unique, helpful characteristics. To help you determine what’s best for your financial situation, you can compare the benefits and drawbacks each strategy has.  

 

  Consumer proposal  Debt consolidation loan 
Advantages 
  • Less debt to repay 
  • Longer repayment time 
  • Keep assets 
  • Prevents debt collection agencies 
  • Improves credit score over time 
  • Allows spending 
  • Potential for saving on interest 
  • Reduced number of payments  
  • Simplified financial management 
  • Can include secured debts 
Disadvantages 
  • May not include secured debt like mortgages 
  • Stays on a credit report for six years 
  • Lengthy and challenging approval criteria 
  • Working with professionals is expensive 
  • May require lump sum payment 
  • Too many missed payments  could lead to annulment  
  • Traditional lenders require good credit score 
  • Requires financial discipline 
  • Can have high interest rates 
  • May have some fees 

Situations For Each Scenario

Another way to help with your decision is to examine your circumstances. Whichever one fits your situation best may be the better fitting solution.  

Choose a consumer proposal if:  Choose debt consolidation when:  
  • You consulted an LIT, and they advised a consumer proposal is a good choice 
  • Other debt solutions didn’t work 
  • The debt is no longer manageable with your current income 
  • Your consumer debts are less than $250,000 in total  
  • You’re only making minimum payments on your credit card 
  • You’re offered a lower interest rate 
  • You have an established financial plan and budget 

Life After Managing Your Debt

Whether you choose a consumer proposal or a debt consolidation loan, the most important stage comes afterwards. With reduced debt or debt payments, it can feel like you have the ability to spend more freely. However, both debt strategies give you an opportunity to build new healthy financial habits. 

Both debt strategies give you a new start. While a goal to be debt-free is a good financial goal, your plan should also include new budgeting strategies and a new perspective on your finances. 

Other Debt Relief Options 

Debt consolidation loans and consumer proposals are not the only ways to improve your financial situation.  

  • Debt management—a program from a credit counselling agency, debt management focuses on helping you repay your entire debt load with your current resources. Some agencies may let you make monthly payments to them while they manage the distribution and may negotiate reduced interest rates on the existing debt obligations.  
  • Debt settlement—you can also have debt settlement companies negotiate with your creditors on your behalf. The creditors may not always accept the negotiation terms, but successful negotiations can result in a significant decrease in outstanding dues.  
  • Bankruptcy—the alternative to consumer proposals is filing for bankruptcy, but it is also the last resort for overwhelming amounts of debt. 

Possible Sources Of Debt Consolidation Loans

Traditional and alternative lenders offer debt consolidation solutions but can have different approval criteria. Depending on the lender you approach, they offer several types of loans.  

Personal Loans 

You’ll find two kinds of personal loans in Canada. They can either be from a traditional financial institution or an alternative lender.   

  • Unsecured—the most common type of personal loan is an unsecured loan, and they usually come from banks. To get approved for an unsecured loan requires a good credit score and reliable income. Having otherwise may lead to high interest rates and low loan amounts.  
  • Secured—getting a secured personal loan means they are supported by collateral, making it easier to qualify. By offering a valuable asset to the lender, you are providing security against the loan, and the lender can acquire your asset if you miss too many payments.   

Home Equity Loans

If you’re a homeowner, you’ve built equity in your home over the years and can access it with the help of Alpine Credits. Home equity loans are secured by your property. Since properties they have potentially high values, the loan you can get may be higher than unsecured personal loans.  

As a secured loan, your credit score may have less influence on your approval. If you own at least 25% of your home, you’re eligible to get approved.   

The value of your equity is the appraised value of your home minus the outstanding mortgage amount. The more equity you have, the more you can borrow, which can be significantly worth more than your outstanding balances combined. 

 

Possible Sources Of Debt Consolidation Loans

Traditional and alternative lenders offer debt consolidation solutions but can have different approval criteria. Depending on the lender you approach, they offer several types of loans.  

Personal Loans 

You’ll find two kinds of personal loans in Canada. They can either be from a traditional financial institution or an alternative lender.   

  • Unsecured—the most common type of personal loan is an unsecured loan, and they usually come from banks. To get approved for an unsecured loan requires a good credit score and reliable income. Having otherwise may lead to high interest rates and low loan amounts.  
  • Secured—getting a secured personal loan means they are supported by collateral, making it easier to qualify. By offering a valuable asset to the lender, you are providing security against the loan, and the lender can acquire your asset if you miss too many payments.   

Home Equity Loans

If you’re a homeowner, you’ve built equity in your home over the years and can access it with the help of Alpine Credits. Home equity loans are secured by your property. Since properties they have potentially high values, the loan you can get may be higher than unsecured personal loans.  

As a secured loan, your credit score may have less influence on your approval. If you own at least 25% of your home, you’re eligible to get approved.   

The value of your equity is the appraised value of your home minus the outstanding mortgage amount. The more equity you have, the more you can borrow, which can be significantly worth more than your outstanding balances combined. 

home equity calculation in Canada

How Debt Consolidation Can Be More Beneficial 

Compared to consumer proposals, debt consolidation loans from your home equity have many more reasons why they can be more helpful than consumer proposals. 

  • Can be done independently—in some instances, managing your finances without additional service is the most efficient way. Some debt consolidation loan options are simple, like home equity loans that have quick application processes and larger loan amounts to help you reduce your debt. 
  • Consolidate any type of debt—because a consumer proposal doesn’t usually include mortgages or vehicle financing, debt consolidation can be more helpful if you have a house or car loan you want to combine.  
  • Protect your credit score—not all debt consolidation loan providers report to the credit bureau, so the loan may not appear on your credit report. Rather, the credit bureau will see that your financial obligations are satisfied, which can raise your credit score.  
  • Get approved more quickly—consumer proposals have to be accepted by the court, and the proposal also has to be accepted by all the creditors. Meanwhile, some debt consolidation loans use other factors that determine your approval, like the equity value of your property.  This process is much quicker, taking a few days compared to a few months.  
  • Save money—consumer proposals can be expensive, and you’ll have to pay fees for the application and to the LIT. Debt consolidation loans do not have any initial costs, and all fees are included in the loan itself. 

Using Your Home Equity To Consolidate Your Debt 

In one situation, Francis from Toronto has three credit cards, of which he owes a total of $35,000. To simplify his financial management, he decided to use the equity he built in his condominium. Because alternative lenders are quicker and have lower requirements than banks, Francis decided they would be the most suitable solution.  

If Francis had not chosen to consolidate his debt, he would have paid significantly more because of the accumulated interest between the three credit cards.  

  Total credit card debt  Home equity loan 
Outstanding balance  $35,000  $35,000 
Interest rate  26%  10% 
Monthly payment  $1,047.92  $743.65 
Term  5 years  5 years 
Payments per month  3  1 
Total interest charges  $27,874.99  $9,618.79 
Total payments  $62,874.99  $44,618.79 

Note: this is a fictional story and doesn’t take into account the additional fees that comes with obtaining a home equity loan. 

How Debt Consolidation Can Be More Beneficial 

If you’re a homeowner in Canada, you have a unique financing option with your home. With Alpine Credits’ help, you can potentially access hundreds of thousands of dollars through your home equity. Applying for a home equity loan takes three simple steps, allowing you to consolidate your debt and achieve financial security sooner rather than later.  

  1. Apply now—applying for a home equity loan takes a few minutes. The main pieces of information you need to provide are your home’s appraised value, your outstanding mortgage amount and your personal details.  
  2. Get approved—if you have at least 25% equity in your property, you’re eligible for a home equity loan from Alpine Credits. As an alternative lender with significantly faster processing times, you could hear back within a few hours of applying.  Alpine Credits has a financial solutions specialist available from 9am to 9pm EST if you’d like to speak to an agent right away. 
  3. Consolidate debt—you’ll receive the money in your bank account through direct deposit within days of getting approved. You can start your new financial plan to become financially secure soon after you decide.   

If you have more questions regarding home equity loans and how they can help you in your financial situation, contact a Financial Solutions Specialist at Alpine Credits.  

Apply now

Frequently asked questions

Consumer proposals and consolidation loans accommodate different financial situations, so the better choice depends on your needs. However, debt consolidation loans allow you to work independently and are less likely to show on your credit report.

Deciding between a debt settlement or a consumer proposal depends on what’s best for your financial situation. Debt settlements are negotiations between each creditor and may require the entire negotiated debt payment at once. Consumer proposals focus on a payment plan to multiple creditors. 

Some disadvantages of getting a consumer proposal include a long approval process, limitations on types of debt, and the total cost. The court must also accept consumer proposals, which could mean paying fees at the risk of rejection.  

After getting approved, the proposal only helps with unsecured debts. In addition, the consumer proposal remains on your credit report for six years.  

Depending on the context of banks liking consumer proposals, they’ll respond differently. If you’re applying for a consumer proposal, banks will most likely accept and may help you. However, if you’re applying for a line of credit or a loan, a consumer proposal on record could affect your approval.  

Depending on your specific situation, consumer proposals can reduce your debt by up to 80%