Is it a good idea to take out a bank loan to repay your consumer proposal?

Recovering financial health is often the main concern of people who must repay a consumer debt proposal. This is why some people consider taking out a loan to pay it off more quickly. But is this solution actually advantageous?

Before making this kind of decision, it is essential to weigh the pros and cons. You should also ensure you understand all the conditions of the loan. Otherwise, the situation could rapidly deteriorate.

Here are the advantages and disadvantages of repaying your consumer proposal with a loan, as well as other solutions.

The disadvantages of repaying a consumer debt proposal with a loan

1. More interest fees must be paid

   A consumer proposal does not carry any interest fees. Therefore, debts can be repaid according to the agreement without paying interest.
   Conversely, a loan obtained to repay a consumer proposal is always subject to interest and will have additional costs attached.
   At the end of the loan, a person who has borrowed money to repay their consumer proposal will have, therefore, paid more than if they had continued to repay the debt proposal.

2. Risk of acquiring more debt

   People who are engage in a consumer proposal do so because they have too much debt. Therefore, it can seem contradictory or risky to take out a loan to repay the consumer proposal.
   Before taking out a loan, we recommend that you examine your financial situation to determine what the most advantageous solution is for you. Is there a risk of acquiring more debt? Will it be possible for you to repay the loan? The key is to make sure that the loan is actually the best solution for you and not a risk.

3. Exposing yourself to recourse by secured creditors

   In some cases, creditors will require collateral before according a loan to repay the consumer proposal.
   In case of payment defaults, creditors could seize the collateral, for example a home. However, as part of the consumer proposal, equity is protected from creditors.
   Before choosing this solution, you should ask yourself: Am I prepared to run this risk?

4. Loan applications may be repeatedly refused

   Obtaining a loan from a financial institution can be a difficult task when you have a consumer proposal on your file. Each application denied by a financial institution will also be added to your credit report, reducing your chances of obtaining the desired loan.
   A co-signer is a practical option to obtain a loan. However, make sure you never miss a payment; otherwise, you may cause friction with your co-signer.

The advantages of taking out a loan to repay a consumer proposal

1. Improves your credit report

   Repaying a consumer proposal can take up to five years. During this period, a note on your credit report will show that you are currently benefitting from a consumer proposal. Once repayment is complete, the note will remain on your credit report for three years before it is removed.
   In total, the note may remain in your credit report for up to eight years.
   Obtaining a loan to repay your consumer proposal more quickly can thus erase this note in a shorter period.

2. Improves your credit rating

   You can positively affect your credit rating if you obtain a loan and repay it within the deadline without delays or payment defaults.
   By respecting the terms of the loan, you can show that you are in good standing, which improves your credit rating. This is true regardless of the loan.

Options to repay a consumer proposal without taking out a loan

There are a number of options to repay your consumer proposal more quickly without taking out a loan. The three following strategies can be advantageous in the short or the long-term.

1. Increase the payment amount

   The first strategy to reduce the duration of the consumer proposal is to increase the payment amount.
   For example, if the payment amount is $300/month, you could raise the amount to $325, $350, or any other total based on your budget. This will reduce the length of the proposal without having to resort to a loan.

2. Apply a lump sum payment

   You can also apply a lump sum payment to the consumer proposal. Obtaining a bonus, an inheritance, a gift, or a tax return are all opportunities to apply a lump sum to the consumer proposal, thereby reducing the length of the repayment period.

3. Increase the frequency of payments

   The third strategy involves increasing the frequency of payments. By making payments more often, the length of the consumer proposal will be reduced.
   For example, a person who pays $300 every month could change their schedule to make payments of $150 every two weeks. While this change will not affect their budget very much, this strategy will allow them to repay $3900 every year instead of $3600. With only a small change, this person can free themselves from their consumer proposal more quickly.

Is a loan right for you?

Wanting to repay your consumer proposal as quickly as possible is a commendable goal. However, you must ask yourself whether it is better for you to resort to a loan or to another strategy to reach this goal.

The key is to analyze your financial situation to make an informed decision that considers your interests and reality.

Our Licensed Insolvency Trustees are also available to advise and support you during this analysis process.