Consolidation loan vs. consumer proposal: What’s the difference?
23 Oct 2018
If you’re juggling monthly payments to multiple creditors, the idea of making a single payment towards the entire amount owed probably sounds like a huge relief. Debt consolidation and consumer proposals are both options to consolidate most debt payments. Here’s how each works!
How do consolidation loans work?
A consolidation loan is a type of personal loan that goes towards paying off your outstanding debts in full. As a result of this, you would owe only one lender, leaving you with the simplicity of only one monthly payment. Typically granted by banks or private lenders, this type of loan allows you to ‘combine’ credit card debt, lines of credit, overdue bills and more.
Though this option is convenient, there are considerations:
- Your credit score may cause your interest rate may be high.
- Your monthly payment may not be affordable.
- You may be charged set up, service, and/or late payment fees.
- You can accumulate more debt during repayment.
- You might not qualify.
If you’re considering a consolidation loan, you must meet the requirements of the lender. They generally are:
- a good credit score
- a moderate amount of debt
- a consistent income
- assets as collateral
- a co-signer
How do consumer proposals work?
Consolidating debt under a consumer proposal applies the same concept of merging all debt into a single payment; however, there are important differences. Unlike a consolidation loan, a consumer proposal isn’t funded by a lender, rather it’s a formal debt relief solution administered by a Licensed Insolvency Trustee (LIT). This process involves an offer to your creditors to repay a portion of the debt you owe. Once accepted, consumer proposals can provide fixed and reduced monthly payments.
There are several benefits to filing a consumer proposal, including the ability to silence collection calls, pay back less than you owe, and remain in control of your assets. Learn more about why consumer proposals have become the more attractive option for debt relief.
A significant difference between a consolidation loan and a consumer proposal lies in the terms of your repayment: how much of your debt you are required to repay and your interest rate. Consolidation loans require you to pay back 100% of your debt at the interest rate set by the lender; whereas consumer proposals require you to pay a portion of your debt at 0% interest. It’s not uncommon for debt to be reduced by up to 80%!
Additionally, while repaying a consolidation loan, your repayment can be easily derailed by taking on more debt, as there are no limitations on applying for new credit cards or loans. Under a proposal, all credit card and line of credit accounts are cancelled, and your credit rating is reduced to an R7, making it more challenging to get approved for credit during the term of the proposal.
There is no cost to meet with a LIT and discuss the best options for your unique financial situation. We offer judgment-free, 30-minute consultations to help you find the best path to debt freedom. Book online or call us today at 1-844-4GT-DEBT to start your path to a brighter financial future.
Freida M. Richer
Helping people solve their debt problems is what energizes me. Over the past 25 years working in both corporate and consumer insolvency, I’ve focused on informing Albertans of viable options to resolve their financial difficulties.
I received my CIRP designation and appointment as Licensed Insolvency Trustee in 2007. I’m a member of the Canadian Association of Insolvency and Restructuring Professionals (CAIRP) and have served on the Board of Directors for the Alberta Association of Insolvency and Restructuring Professionals (AAIRP).
I’m dedicated to bringing awareness to the importance of financial literacy and sharing my insights as a Licensed Insolvency Trustee through various media platforms and presentations. My op-ed piece on “The Culture of Credit” was published in The Globe and Mail and, over the last 5 years, I’ve been a regular commentator on Global Edmonton Morning News “Money Smarts” segment which you can watch on the last Monday of every month.
I enjoy hiking with my dog, Einstein, and unwinding by playing my piano.
Testimonials
“…I also at this time would like to say “Thank You So Much Freida” for all of your guidance, your professionalism, your understanding, and your advice through-out this process. It has been a real challenge and yet as I close this chapter of my life it has also been a tremendously positive learning experience and I promise to never get into financial trouble again.” – William, Nisku, AB