If you’re currently working your way through a consumer proposal, you may be wondering if you can pay off your consumer proposal early so you can start rebuilding your credit. While you can increase your payment amounts or payment frequency, you can also use a loan to pay off your consumer proposal early. That way you can recover your credit faster from the damage your consumer proposal had on your credit.
Key Points
- Yes, you can use a loan to pay off a consumer proposal.
- You may be able to get a loan to pay off a consumer proposal through private lenders. Secured loans may be easier to qualify for.
- You should only consider using a loan to pay off a consumer proposal if your overall financial situation has improved and the improvement in your credit is worth the interest you’d pay on a consumer proposal loan.
- You can also pay off your consumer proposal early by increasing your payment amounts or frequency and making lump sum payments.
Can You Use A Loan To Pay Off Your Consumer Proposal?
In short, yes, there are some lenders that offer loans to help you pay off your consumer proposal early. However, these loans typically come with high interest rates, some of which are as high as 35%.
Even if the lender can keep your loan payments similar to your consumer proposal payment, the term will be longer due to the added interest.
That said, using a loan to pay off your consumer proposal can still be an attractive option because you can start rebuilding your credit sooner. Additionally, it can help you avoid the risk of financial emergencies causing missed payments, which could lead to your consumer proposal being annulled.
Benefits Of Using A Loan To Pay Off Your Consumer Proposal
Consumers who are currently working through a consumer proposal are without a doubt experiencing financial issues, this is why taking on a loan may not be the best solution for your current financial situation. That being said, it doesn’t mean that it is the wrong choice for everyone.
Start Rebuilding Credit Sooner
When you file a consumer proposal, you’ll receive an R7 rating on your credit report, which will stay for 6 years after you filed or 3 years after you completed the program; whichever is earlier.
That’s a long time before you can start building your credit. Instead, you can use a loan to pay off your consumer proposal today and start rebuilding your credit right away. Moreover, lenders generally report the payments you make on the consumer proposal loan to the credit bureau(s), which can help build your credit.
Learn more: Life After A Consumer Proposal: Fastest Way To Build Credit
Stays On Credit Report For A Shorter Time
As mentioned above, a consumer proposal is removed from your credit report 3 years after you paid the consumer proposal or 6 years after being filed. As such, if you pay off your consumer proposal after 1 year, it’ll only be on your report for 4 years.
By paying off the consumer proposal sooner, you’ll be able to shorten the length of time the consumer proposal is on your credit report.
Alleviate The Stress Of Consumer Proposal Being Annulled
If you experience a financial emergency or lose your job and are unable to make your consumer proposal payments, your proposal can be annulled. If annulled, you’ll be responsible for all your debts, including the portion “forgiven” with the proposal.
By paying off your consumer proposal with a loan, you don’t have to worry about missing payments and having your proposal annulled.
| What Happens If You Miss A Consumer Proposal Payment? Generally, missing a consumer proposal payment is not good given that part of your loan is being forgiven. That being said, you will only run into serious trouble when you miss three consecutive monthly payments. At this point, your consumer proposal will automatically be annulled which is a fancy way of saying that your proposal is no longer in effect. If your consumer proposal is annulled, protection from creditors is no longer applicable to you and penalties and interest could be reinstated. |
Remove Stigma Quickly
Being in a consumer proposal, unfortunately, does come with a stigma. Whether you’re applying for a loan, insurance or a rental unit, a consumer proposal can affect your ability to secure it. Even if you have a stable income, a consumer proposal can make it more challenging and more expensive to secure a loan, an insurance policy or even a rental unit.
Paying off your consumer proposal with a loan early can help remove it from your credit report quickly.
Where Can You Get A Loan To Pay Off A Consumer Proposal?
Most consumers won’t be able to pay off their consumer proposal with a personal loan, as they likely won’t be able to access enough money to cover the proposal or get approved at all.
That said, some private lenders are willing to lend money to help you pay off a consumer proposal. Secured loans such as a home equity loan or home equity line of credit may be easier to qualify for due to the security it provides. Moreover, you may qualify for much lower rates, making it more affordable than a personal loan.
- Home equity loan – If you opt for a home equity loan, you’ll be able to spread your payments over 5 to 10 years.
- Home equity line of credit (HELOC) – With a HELOC, you only have to make interest payments during the draw period (up to 10 years). After that, you’ll need to make principal payments which can stretch up to 20 years. That said, it’s recommended that you make as much of the principal payments during the draw period.
Note: In addition to the interest, you’ll be hit with a number of fees such as legal fees, admin fees, home appraisal fees and title search fees.
Learn more: Can You Use Your Home Equity To Pay Off A Consumer Proposal?
How To Qualify For A Loan To Pay Off A Consumer Proposal?
In order to qualify for a loan to pay off your consumer proposal early, you’ll need to meet a few requirements.
- You’ll need to be a citizen or resident of Canada
- You’ll need to have a stable income that is high enough to cover the loan payments
- You’ll need to own your home and have built up at least 20% equity (if tapping into your home equity)
Documents Required To Get A Consumer Proposal Loan
- Documents To Verify Personal Details. Your lender will require one to two pieces of ID (a Government Issued Photo ID) to verify your identity and address. You may also provide a utility or cell phone bill as proof of address.
- Documents To Verify Income. To verify your income and job stability your lender may request a letter of employment, pay stubs and/or a bank statement.
- Documents About Your Consumer Proposal. Your lender may also request certain information about your consumer proposals such as your payment schedule or payout letter.
Risks Of Using A Loan To Pay Off A Consumer Proposal
- Interest Payments. Consumer proposals do not have interest payments, other loans do. If you take out a new loan, you’re going to end up paying more with the interest tacked on.
- More Debt. Taking out a loan to pay off your consumer proposal means you’ll be taking on new debt. This is an added financial risk that some consumers may not want to take on.
- Limited Loan Amounts. Depending on how much the lender offers and your consumer proposal amount, you may not be able to cover the entire consumer proposal with the loan.
- Lose Home. If you use your home equity to pay off your consumer proposal, you’re risking your home. Only use a home equity loan or line of credit if you’re sure you can make the payments.
Should You Use A Loan To Pay Off Your Consumer Proposal
Whether you should use a loan to pay off your consumer early depends on your goals and your current financial standing.
Use A Loan To Pay Off Your Consumer Proposal If.
- You want to start rebuilding your credit right away.
- You can afford the high interest rates that come with a consumer proposal loan.
- You have a stable job.
Paying off your consumer proposal with a loan – means you need to make interest payments but you’ll get a head start on rebuilding your credit.
Don’t Use A Loan To Pay Off Your Consumer Proposal If:
- You don’t mind waiting until the consumer proposal is paid off to begin building credit.
- You can’t qualify for a loan big enough to cover the entire consumer proposal.
- The cost or risk of the consumer proposal loan isn’t worth the credit boost.
Following through with the consumer proposal – means you don’t need to make interest payments but your consumer proposal will appear on your credit report longer.
| Note: Is The Cost Of Interest Worth The Credit Improvement? You should consider whether the improvement in your credit is worth the interest you’d pay on a consumer proposal loan. |
Alternative Ways To Pay Off Your Consumer Proposal Early
If taking out a loan to pay off your consumer proposal isn’t a good option for you, there are alternate ways you can pay off your consumer proposal early. You may have to work a little harder to pay down the consumer proposal quickly, but it is definitely worth it to be free of the obligation.
- Increase your payment frequency. Instead of making monthly payments, make weekly or bi-weekly payments. Budgeting will be easier this way, particularly if you align payments with your paycheque schedule.
- Increase your payment amount. If you can afford it, increase the amount you pay each period. This way you’ll be paying the balance down faster.
- Lump sum payment. Every now and then people get some extra money, whether it’s from a bonus, tax return, or gift. You can use that extra money to make a lump sum payment towards your consumer proposal.
Learn more: Pay Off My Consumer Proposal Early
Should You Use Your RRSP To Pay Off Your Consumer Proposal?
Generally, it is not recommended that you use your RRSP to pay off your consumer proposal. The benefits of paying off your consumer proposal don’t offset the drawbacks of withdrawing from your RRSP.
Here are a few things you should consider before opting for his option:
- You’ll have to withdraw more than the consumer proposal amount due to the withheld taxes.
- Your RRSP withdrawals will affect the total taxes you owe (or will get back).
- Withdrawing from your RRSP early can impact your investment growth and potentially your future retirement funds.
- If you have an employer contribution plan where they match your RRSP contributions, they may halt if you withdraw from your RRSP, until you replace it.
What Should You Do If You Can’t Afford Your Consumer Proposal?
If possible, you should reach out to your Licensed Insolvency Trustee ahead of time, before you miss a payment. If you know you’re going to miss a payment, it may be possible to amend your consumer proposal or receive additional advice from your Trustee on how to handle your finances.
In addition, some consumer proposals allow delays in payments, your Trustee can indicate whether this is true for you or not. There is one catch associated with amending a consumer proposal. Lenders don’t have to accept an amendment which means that the entire proposal could be cancelled should they decline the amendment.
Can You Revive Your Consumer Proposal After An Annulment?
Your consumer proposal can be revived by contacting your Trustee within 30 days of the annulment. If you miss the 30-day mark, you’ll have to go to court.
If you miss three payments, your first step is to contact your Trustee, if they aren’t in contact with you already. Keep in mind that if your consumer proposal is revived, you will need to get up to date with payments.
What Can You Do If You Can’t Afford or Revive Your Consumer Proposal?
If all else fails with your consumer proposal payments and you can no longer afford to make them, you can file for bankruptcy. Becoming debt-free should be a priority of yours, and for some, bankruptcy is the best option. In conjunction with filing for bankruptcy, you should consider attending credit counselling sessions to learn more about personal finance and how to effectively manage money for future success.
Bottom Line
For some, saving money on interest is more important than having good credit. For others, credit health is more crucial than the cost of financing. The only way you can decide whether or not to use a loan to pay off your consumer proposal is by considering your current financial position and future financial goals.
