Debt Consolidation vs. Consumer Proposal: The Difference

What is the main difference between debt consolidation and a consumer proposal and the benefits of each? When would it be ideal to choose debt consolidation services in Toronto over a consumer proposal and vice versa?  A consumer proposal refers to an offer that a borrower makes to all his/her creditors. In the offer, you agree to a single monthly payment. The main advantage of a consumer proposal is that it allows you to pay only a portion of your debt. On the other hand, debt consolidation entails taking one loan and using its proceeds to pay off all other outstanding smaller loans. By taking a big loan to pay smaller loans, you are able to increase your leverage and lower your interest rate.

Consumer Proposal

When seeking to consolidate credit into a single, lower monthly payment, a consumer proposal may be a better option than debt consolidation. With a consumer proposal, you are able to get the advantage of paying one consolidated monthly payment, as in the case of debt consolidation. However, the consumer proposal offers you an additional benefit of paying a portion of your debt instead of paying the entire amount, as in the case of debt consolidation.

A consumer proposal is interest-free. You will repay your debt interest-free, unlike debt consolidation. With consolidation, you will take an additional consolidation loan that will continue to run interest.

A consumer proposal deals with all your outstanding debts and allows you to pay a lower amount than you owe your creditors.

You can attain a low monthly repayment with consumer credit. In addition, there are no collateral needs, and you do not risk losing your assets as is the case with a secured debt consolidation loan.

A consumer proposal is effective in stopping all collection action and prevents all forms of wage garnishment. With a consumer proposal, you can repay the debt in a quicker period with no penalties.

With a consumer proposal, you will have legal protection from your creditors because the proposal is filed with a licensed insolvency trustee. The trustee is an officer of the court, making a consumer proposal a legal document.

Debt Consolidation

Debt consolidation may be an ideal option if you have a good credit rating that allows you to get a debt consolidation loan. If you have good cash flow to help you pay the installments for a debt consolidation loan, the loan may be a good option.

Unlike a consumer proposal, a debt consolidation loan will not have a negative effect on your credit history. Even if you have to pay the outstanding debt in full, you will be able to pay the debt in a creative and less stressful manner.

When is a Consumer Proposal Ideal?

In some situations, a consumer proposal may be a better option compared to a debt consolidation loan. For instance, if you have a negative credit history, which hinders you from accessing a loan, a consumer proposal may be ideal.  You may also go for the proposal if you are not able to meet the new proposed payment through a consolidation loan.

By considering the pros and cons of both debt consolidation loan and a consumer proposal, you can choose the ideal option.