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Can you use a loan to pay off your consumer proposal?

Pay off your consumer proposal early with a specialized loan, and start rebuilding your credit today.

If you want to start rebuilding your credit after taking out a consumer proposal, you could be in the market for a specialized loan to pay off a consumer proposal. This type of loan can help you pay off your debt so you can get back to better credit in less than three years. The main downfall is that you’ll have to pay interest on a consumer proposal loan, while payments on just the consumer proposal is interest-free.

What is a consumer proposal?

A consumer proposal is an agreement that you enter into with your creditors to begin to repay all of your debts. To negotiate your agreement, you work with a Licensed Insolvency Trustee (LIT) to figure out how much you’ll have to pay back. Usually you’ll get a portion of your debt forgiven by your creditors when you sign up for this type of agreement, and all forms of debt collection against you will typically cease.

Once your consumer proposal is accepted, your debt will be consolidated into one easy-to-manage monthly installment. You’ll typically get around 5 years to pay off your proposal and your credit score will go down to one of the lowest ratings possible (R9). Once you pay off your proposal, your credit score will go up to at least an R7 and you’ll need to work hard to rebuild your credit over time.

What is consumer proposal?

Should I pay off my consumer proposal early with a loan?

A consumer proposal loan is a specialized loan that can help you pay off your consumer proposal early. These loans typically come with interest rates that sit above 20%, making them much more expensive than consumer proposals themselves, which are interest-free.

One of the main benefits of taking out this type of loan is that your credit score will go up as soon as your consumer proposal is paid off. Another perk is that your lender will typically report all of your on-time payments to the credit bureau so that your credit score will continue to rise as you pay down your loan.

The downfall of getting a loan to pay off a consumer proposal is that you’ll typically pay much higher fees and interest on any money you borrow. It’s also possible that you could end up in more debt if you can’t afford your loan repayments once your interest starts to accumulate.

What are the benefits of a consumer proposal loan?

There are a number of benefits to taking out a consumer proposal loan. These can include the following:

  • Online application. Depending on your lender, you should be able to apply for a consumer proposal loan online in a matter of minutes.
  • Set repayments. You’ll be able to negotiate affordable monthly repayments that suit your unique set of needs, lifestyle and budget.
  • Better credit score. Your credit score will improve from either a R9 or R7 rating as soon as you pay off your consumer proposal, which will make it easier to apply for loans.
  • Less time to rebuild credit. You can enter your 3-year “bad credit” period faster, which will let you start rebuilding your credit as soon as possible.
  • Reporting to the credit bureau. Many lenders will report your repayments to the credit bureau so that you can rebuild your credit score in less time.
  • Early repayment options. You may be able to pay your loan off early for no additional fees if you have surplus income or receive a lump sum payment.
  • Dedicated support. You’ll usually get a high calibre of customer service from a dedicated lending agency.
  • Bad credit doesn’t matter. You may be able to get approval for a loan to pay off your consumer proposal even if you have bad credit.

What should I watch out for?

There are a number of potential drawbacks to taking out a loan to pay off your consumer proposal:

  • High interest rates. You’ll end up paying a lot more in interest on a loan, since the main draw of a consumer proposal is that it’s interest-free.
  • Minimum loan terms. You may get locked into a minimum term on a loan, while a consumer proposal can be paid off at any time with no penalty.
  • Capped amounts. You might only be able to pay off a portion of your consumer proposal with a loan, since they’re usually capped at a certain amount.
  • Additional fees. You may have to pay hundreds of dollars in extra fees to negotiate exiting your consumer proposal and signing up for a loan.

What should I know before I apply?

Eligibility requirements

To apply for a consumer proposal loan, you usually need to meet the following criteria:

  • Be at least the age of majority in your province or territory (either 18 or 19 years old)
  • Be a citizen or resident of Canada
  • Have a consistent source of income
  • Not be in bankruptcy or have insurmountable debt

Required documents and information

  • Government-issued ID. You may have to show proof of ID such as your driver’s licence or passport.
  • Proof of address. You’ll likely need to prove that you have a permanent address by providing a utility or cell phone bill.
  • Proof of income. You’ll often be required to show documents like pay stubs or letters of employment to show that you have a steady job.
  • Bank statements. You may need to show your bank statements to prove that you have money in the bank to cover your payments.
  • Information about your consumer proposal. You may have to submit info about your consumer proposal, like your payout letter and payment schedule.

How else can I pay back my consumer proposal back early?

If you don’t think a loan is the right fit for you, there are other ways you might be able to repay your consumer proposal ahead of schedule:

  • Pay more each month. You can pay down your consumer proposal faster if you raise your monthly payment amounts or make more frequent payments.
  • Pay a lump sum onto your balance. You’ll make better progress on your debt if you put any additional income you receive directly onto your balance.
  • Refinance your mortgage. You may be able to repay your consumer proposal by adding the amount you owe to your mortgage when you refinance.
  • Borrow from family or friends. If the amount you owe is small enough, you may be able to borrow extra funds from family or friends.
  • Make payments more often. You’d be surprised at the difference paying weekly or biweekly can make instead of paying monthly. If you pay $360 a month, that’s a total of $4,320 a year. But if you pay $180 biweekly or $90 weekly, the total rises to $4,680 each year.

How to pay off a consumer loan early

Bottom line

Consumer proposal loans can help you pay off your outstanding debt so that you can get back on track with your credit. These loans are suitable if you want to improve your credit score and don’t mind paying interest on the amount you borrow. Find out more about how you can qualify for this type of loan and apply today.
Want to learn more? Check out these helpful guides:

Frequently asked questions about consumer proposal loans

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