Key Features of a Consumer Proposal and Debt Consolidation Loans
Impact on Amount Owing
- Taking out a debt consolidation loan does not alter the total amount of your debt obligations, although it should lower your interest charges. It merely changes the source of your borrowing. If you were having difficulty making your monthly repayments in the past, then unless there is a large savings in the interest being paid, your financial position will not be materially improved.
- If you file a Consumer Proposal the amount you owe will generally be reduced by up to 70 %. This is a significant amount and provides you with a unique opportunity to start rebuilding your finances earlier.
- You will continue paying interest on the new loan although the interest may be lower
- Interest charges stop once your proposal is accepted and no new charges are incurred
Raising a New Consolidation Loans
- If you have had problems in the past repaying your debts on time, then your credit records will indicate this. Any new lender whom you approach will review these records and unless you have a clean record it is unlikely they will grant you a new loan.
- If your credit record is impaired then the new lender may require some additional security such as a second mortgage over your house. Unless you are confident that you will be able to manage your ongoing payments this could be a risky path to follow
- Alternately a family member may be required to co-sign on the new loan, meaning that they will be partly responsible for your debts if you default
- With a new consolidation loan, any existing legal actions such as a wage garnishment will continue in force – they do not stop unless a settlement is reached with that individual creditor
- Under a consumer proposal, ALL legal actions cease the date you file your proposal.
- If you were subject to a wage garnishment then this is stayed and you will resume getting your full wages
Early Pay Down
- Under a consumer proposal you have the ability to pay down or pay your proposal off in full without any penalty. However if you miss only one payment because of some unforeseen circumstance your proposal will still be in effect provided that it is made up later
Impact on Credit Score
- A new consolidation loan will have no impact on your credit score. But like other loans if you start to miss payments they will be reflected on your records
- Under a consumer proposal your credit score will be affected when you file your proposal but you receive the benefit of having the amount you have to repay significantly reduced.
What is Debt Consolidation Loans?
A Debt Consolidation loan is a new loan that you negotiate with a lender which offers a lower interest rate than what you are paying on your current loans, be they credit card debts or lines of credit. The purpose of this is to replace the old loans with one new loan but at a lower rate.
The following example illustrates the point:
|Loan Type||Amount Owing||Interest Rate||Annual Interest|
|Store Card||$ 6000||29%||$ 1740|
|Credit Card||$ 7000||20%||$ 1400|
|Other loan||$ 10000||12%||$ 1200|
|Total Existing||$ 23000||$ 4340|
|New Loan||$ 23000||14%||$ 3220|
|Interest Savings||$ 1120|
If you were able to get a new loan at 14% then you would save $ 1120 in interest charges each year.
In summary, a debt consolidation loan makes sense if the interest saving are big enough and you are sure that you can meet your ongoing repayment commitments within your existing budget. If your household budget is too tight and there is a possibility that you will fall behind in your payments because the amount owing is still too high then this option may not be the best one for you.
A consumer proposal may be a better solution given all the benefits and protection is offers you.