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Have you recently filed a consumer proposal to deal with your debt and take back control of your finances?

Have you been thinking about taking out a personal loan but aren’t sure if that’s possible because of the consumer proposal and credit score issues?

This article is for you!

Is It Possible To Get Approved For A Loan During A Consumer Proposal?

If the vast majority of your income is going toward your consumer proposal payments, you might end up with no money left over for your other expenses, or to deal with any unexpected costs that come your way.

While a consumer proposal can be pretty damaging to your credit and finances and many lenders will deny your applications because of that fact. It’s still possible to get approved for a loan under the right circumstances. You will have an easier time getting approval if you wait until your proposal is finished. But, a loan can be acquired during your payment schedule. However, that approval will be much more difficult to earn than it would be if you didn’t have that consumer proposal hanging over you.

Here’s what to expect when you apply for a loan during your consumer proposal:

  • Your credit and finances will be inspected to determine your creditworthiness.
  • Being in a consumer proposal definitely reduces your creditworthiness, so you’ll need to prove that you at least have steady employment and a decent income.
  • Your lender will then contact your consumer proposal administrator or Insolvency Trustee to confirm that you’ve been responsible with your payments thus far.
  • Your trustee can’t prevent you from getting a loan. However, they will work closely with you to make sure you’re only taking on a loan that you can afford.
  • You need to show your administrator/trustee and your lender that you can afford both your consumer proposal and potential loan payments.

Find Out If You Qualify


Make Sure You’re Getting The Right Loan For Your Financial Situation

So, we’ve determined that while it’s difficult to obtain, loan approval is possible if you can prove that your consumer proposal has made you a more responsible borrower. Now it’s time to discuss how you should go about getting your loan. Below, we’ve provided a step-by-step process that you can follow to avoid further debt problems or having your application denied altogether.

Step #1: Find The Right Lender

One of the main problems with getting a loan while you’re in a consumer proposal is finding a lender that will not only approve you but is a legitimate lender. Unfortunately, most prime lenders, like banks and credit unions, have strict regulations for their borrowers, so you may find it very difficult to gain approval from them. In that case, you may have to apply with an alternative, private, or bad credit lending source.

What to Watch Out For With Alternative, Private, And Bad Credit Lenders

Be cautious when trying to find a lender who’ll approve you during your consumer proposal. While approval can be easy enough to get with one of these lenders because they often cater to clients with similar debt-related issues, there are some things that you definitely need to watch out for, including but not limited to:

  • If you are approved, your bad credit status might cause them to give you a much higher interest rate, making your loan more expensive over time.
  • That high rate could bring about further debt issues for you and make you default on your consumer proposal payments.
  • Predatory lenders often use your bad credit to charge unreasonably high-interest rates (higher than is legally permitted in your province).
  • Scam artists establish fake lending sources to trap unsuspecting borrowers and steal their financial information.
  • Your desperation for a loan may cloud your judgment and make you fall for their trap, which is what they’re counting on.
  • Identity theft and fraud can cause even worse damage to your financial health.

To avoid these situations, do a lot of research prior to applying. Compare lenders in Canada. Look up customer reviews and check to see that the lender’s company name shows up in the Better Business Bureau database. Remember, if the deal sounds too good to be true, it probably is.

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Step #2: Discovering The Application Process

Let’s say you’ve found a legitimate lender who’s willing to grant you a loan. Like with any credit product, you’ll have to go through your lender’s particular approval process.

Factors Your Lender Might Look At During The Application Process

While the application and approval processes vary from lender to lender, yours might be particularly strict simply because of your consumer proposal. However, the main elements of a typical application process will still be present, including but not limited to an inspection of:

  • Your income, bank statements, and overall financial health
  • Your employment record and current source of income
  • Your debt and payment history
  • Your assets
  • Your cosigner’s financial health
  • Your current credit health
  • Your proposal payment amounts and the length of your payment schedule
  • Any debts that might not be covered by a consumer proposal (mortgages, secured car loans, and other secured debts)

Step #3: Prepare Yourself To Apply

Again, as it should be with any credit product, it’s important to prepare yourself properly before you apply. You should even double your efforts, considering how unworthy of credit your consumer proposal will make you appear to be.

Essential Steps To Take When Applying For A Loan:

  • Determine how much of a loan you would need. Remember to only apply for a loan amount that you’re 100% sure you can afford down the line.
  • Get a loan quote from your potential lender. Make sure they include the interest rate and any administrative fees involved.
  • Factor those costs into your budget. Consider your other daily expenses too.
  • Be certain that your income and savings would support your loan payments under any circumstance (job loss and other financial emergencies)  
  • Spend some time making responsible consumer proposal payments beforehand.
  • Do the same with any debts that didn’t qualify for the proposal.
  • Improve your credit however you possibly can.
  • Organize and update any financial information your lender needs.
  • If necessary, consider offering up assets (home, car, etc.) as collateral.
  • If necessary, find a cosigner who has a good credit status, income, and net worth.

Another important note: While offering assets or using a cosigner can increase your approval chances and earn you a lower interest rate, severe consequences might arise if you default. If you stop making loan payments, your asset might be repossessed (car) or foreclosed (home) and sold at auction so the lender can recuperate part of their investment. In the case of a cosigner, the responsibility of your payments will fall to them if you default.

How A Consumer Proposal Affects Your Credit

It’s also best to realize the potential consequences that one of these proposals can have on your credit health. While it is true that a consumer proposal can eliminate the majority of your debt problems, it can have a cumbersome, lasting effect on your credit.

Here’s How:

  • During your proposal, your credit rating will drop to an R7 status. This is the third-lowest rating next to having your assets in repossession (R8) and bankruptcy (R9).
  • Over the course of your proposal, it’s likely that your credit score will be damaged severely and it will be difficult for you to improve it.
  • While timely, full payments should raise your score little by little, every late or missed payment will only make it worse.   
  • Depending on the credit reporting agency you look at (Equifax or TransUnion), a record of your proposal can stay on your credit report for 3-7 years following its completion.
  • That lowered credit status may prevent you from getting approved for the loans and other credit products that you apply for in the future.

Cost Of A Loan For Different Credit Ranges

In this example, we used a $5,000 loan paid monthly with a two-year term to illustrate how credit scores can affect the total cost.

Estimated Interest Rate Based On Credit ScoreTotal Interest Based On Lowest Estimated RateTotal Interest Based On Highest Estimated Rate
Poor Credit Score (300 - 559)18% to 46.96%$11,981.78$15,601.48
Fair Credit Score (560 - 659)15% to 35%$11,636.80$14,044.47
Good Credit Score (660 - 724)5% to 29.99%$10,529.13$13,417.84
Very Good Score (725 - 759) 3% to 17%$10,315.49$11,866.14
Excellent Credit Score (760 - 900)1.5% to 10%$10,157.00$11,074.78
Note: These rates are for illustrative purposes only. Actual charged rates will depend on the lender, your credit and your overall financial profile.

What Is A Consumer Proposal?

A consumer proposal is a legally binding agreement between you and your lenders. It is administered by a Licensed Insolvency Trustee, a certified agent of the court trained to deal with consumer proposals and bankruptcies. These proposals are reserved for borrowers who have too much debt to handle on their own. A consumer proposal can help reduce their debt level, while at the same time satisfying their lender’s demand for payment.

If that’s the case for you, here’s what the process may look like:

  • You’ve racked up too much consumer debt to consolidate using your income
  • No other payment solution works (debt consolidation, debt settlement, etc.).
  • You’ll explain your debt situation and have your finances evaluated by your trustee.
  • Your trustee will then draw up a proposal for a reduced debt amount.
  • The trustee will send the proposal to your lenders on your behalf.
  • Your lenders will meet to discuss whether the proposal is acceptable.
  • If the proposal is accepted, all collection efforts and wage garnishments against you will cease soon after.
  • You’ll then make scheduled payments toward your trustee over several months, possibly several years, depending on your debt amount.
  • Your trustee will send those payments to your lenders.  
  • During that time, you’ll also have to attend several credit counselling sessions.
  • Once your proposal has ended and all your payments have been made, the hope is that you’ll be debt-free and can start with a clean slate.

Things To Consider When It Comes To Consumer Proposals

While a consumer proposal can be beneficial, like any debt product they do come with some drawbacks that you should consider before you decide to file for one. After all, consumer proposals are not right for everyone. They’re meant to be used by borrowers in very unhealthy debt situations as a last resort before declaring bankruptcy.

Consider these facts before you file for a consumer proposal:

  • Like any financial product, you’ll need to go through a qualification process
  • To qualify, you need to have a maximum of $250,000 worth of debt
  • If the debt is spread between you and your partner or spouse, that maximum debt level is $500,000
  • Only certain unsecured debts qualify (credit card bills, lines of credit, etc.)
  • You must also prove that you have no other way of paying your debts
  • At least 51% of your lenders need to accept the proposal for it to go through

Click here to learn when your consumer proposal will be accepted or rejected.

Are You In A Consumer Proposal?

If you’re in the middle of a consumer proposal and need a loan, Loans Canada can help find you the right financial solution to meet your needs.    

Lisa Rennie avatar on Loans Canada
Lisa Rennie

Lisa has been working as a personal finance writer for more than a decade, creating unique content that helps to educate Canadian consumers in the realms of real estate, mortgages, investing and financial health. For years, she held her real estate license in Toronto, Ontario before giving it up to pursue writing within this realm and related niches. Lisa is very serious about smart money management and helping others do the same.

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