Consumer proposals can be a lifesaver if you’re struggling to repay your debt, but they can also bring down your credit score significantly. What’s worse is that they stay on your credit report for three years after you pay them off, which can make it difficult to qualify for loans.
If you’re stuck paying down your consumer proposal, you’ll be relieved to know that it’s possible to make early payments. Keep reading to learn more about what your options for early repayment are and whether this might make sense for you.
What is a consumer proposal?
A consumer proposal is a legal agreement that you make with a legal “trustee” to tackle your debt and pay it off in under five years. Together, you’ll come up with a proposal to submit to your creditors. This proposal will typically aim to reduce the overall amount of money you owe to creditors and extend the time you have to make your repayments.
When your consumer proposal is accepted, all of your debts will be combined into one interest-free monthly payment. Your creditors will also have to cease all forms of debt collection, including wage garnishment and late penalties. The downside of a consumer proposal is that when it’s accepted, your credit score will drop immediately.
Can I pay back my consumer proposal early?
You can pay a consumer proposal back early without any penalties or fees. The terms of your consumer proposal will also be set for the duration of your repayment period. This means that if you get a raise or an inheritance you won’t have to pay anything more to your creditors and you can use the money to pay your current debt off faster.
While it might seem tempting to pocket any extra cash you’re making, it makes a lot of sense to use it to pay your consumer proposal off early. This is because the earlier you pay it off, the earlier it will come off your credit report. And the earlier it’s off your credit report, the easier it will be for you to qualify for future loans and other forms of credit.
How can I pay back my consumer proposal early?
While you’ll typically have a repayment schedule that spans five years, you can get ahead of the curve by taking a number of actions:
Top up your monthly payments. You can try to cut down on your other expenses or ask for a raise at work to put more money onto your payments each month.
Change your payment frequency. You could change your monthly payments to weekly or bi-weekly payments to get a head start on paying back the money you owe. 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.
Pay a lump sum onto your balance. If you come into some unexpected funds (from an inheritance or tax return, for example), you could put this money 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.
Take out a consumer proposal loan. You could take out a loan to get out of your consumer proposal early, though you’ll have to pay interest on any amount you borrow. This is not an ideal solution, so first consider options that do not involve taking on new debt.
What are the benefits of paying my consumer proposal back early?
There are a number of benefits to paying your consumer proposal back early:
Fee-free. You won’t have to pay any fees or penalties for early repayment.
Shorter repayment schedule. You’ll be able to get out of debt faster if you make early repayments.
Less time to rebuild credit. You can enter your three-year “bad credit” period faster, which will let you start rebuilding your credit as soon as possible.
Fewer payments. You’ll be less likely to default on future payments if you take care of your outstanding debt while you’re in the green.
What should I watch out for?
In addition to the benefits of consumer proposals, you should keep an eye out for these potential pitfalls:
Larger monthly repayments. You’ll have to pay more on your monthly payments, which could lead you to default on other expenses.
Depletes your savings. If you choose to put more money onto your consumer proposal, it means you’ll have less to put away for your emergency fund or savings.
No savings for early repayment. You won’t be saving money by paying your consumer proposal off early because it comes with no interest.
Still damages credit. The damage to your credit is still done even if you pay your consumer proposal off early.
Ensure you look at the right loans. You could run into further financial hardship if you take out loan to wipe out your consumer proposal so be sure you’ve done your research.
Are there loans to pay off consumer proposals in Canada?
Currently, these loans are hard to come by in Canada as lenders prefer less risky applications. If you do find loans to pay off your consumer proposal, expect to pay high rates and fees and make sure it won’t cause more financial hardship.
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.
A benefit of taking out this type of loan is that your credit score will go up as soon as your consumer proposal is paid off. The downfall of getting a loan to pay off a consumer proposal is that you’ll typically pay high 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.
Benefits of using a loan to pay off a consumer proposal
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.
Drawbacks
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.
Requirements of consumer proposal loans
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 will a consumer proposal affect my credit?
When you file for a consumer proposal and it gets accepted, in some cases your credit score will drop to an R9 (which is the lowest score you can have). This tells creditors that you’re a risky borrower, which can make it difficult for you to apply for loans. You’ll also have to contend with having your consumer proposal on your credit report for three years after you pay it off (at a rating of R7).
This means that if you pay your consumer proposal off over a standard five-year term, your credit will be negatively impacted for up to eight years. For this reason, many borrowers choose to pay their consumer proposals off early so that they can tackle their low rating and begin to rebuild their credit faster.
Bottom line
Paying off your consumer proposal early can help you start rebuilding your credit faster. However, it won’t save you money or protect you from damage to your credit score. For this reason, you should only pay your consumer proposal off ahead of schedule if you have the money to do so without financial consequences.
Frequently asked questions about loans to pay off a consumer proposal in Canada
You’ll usually pay over 20% interest on your consumer proposal loan, in addition to any extra fees you’re charged to negotiate your exit from your consumer proposal.
Luckily for you, it won’t cost you anything. There are no fees or penalties charged when you pay your consumer proposal off early.
It depends on your financial situation. If you want to get your credit score back up faster it might make sense for you to pay interest on a consumer proposal loan so that you can clear your other debt.
If you’re not sure you can afford the extra interest or you think you might struggle to make your repayments, and a consumer proposal might not be worth it and you should probably stick with your consumer proposal until your finances improve.
Consumer proposals are usually set for you to pay them off in 3-5 years. Paying them off early has the benefit of helping you to restore your credit faster.
These loans report your on-time payments to the credit bureau and let you build up your savings with secured financing. For more on this strategy for improving your credit, read our guide on secured savings loans here.
The biggest difference? Insolvency is not a legal status, while bankruptcy is. Insolvency can lead to bankruptcy and is a state of being unable to pay your debts on time. On the other hand, bankruptcy releases you from your debts, but it also has long-term consequences.
If you don’t make payments on your consumer proposal, it may be cancelled. If that happens, you’ll lose all the money you put down on it already and your creditors can resume collecting fees and interest on your debts.
No, you should avoid payday loans while in a consumer proposal. With their high APRs and short repayment terms, payday loans are a very expensive way to borrow and make it easy to get trapped in a cycle of debt.
Claire Horwood is a writer at Finder, specializing in credit cards, loans and other financial products. She has a Bachelor of Arts in Gender Studies from the University of Victoria, and an Associate’s Degree in Science from Camosun College. Much of Claire’s coursework has focused on writing and statistics, with a healthy dose of social and cultural analysis mixed in for good measure. In her spare time, Claire enjoys rock climbing, travelling and drinking inordinate amounts of coffee.
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