Debt Consolidation vs Consumer Proposal: Which is Right for You?

If you’re struggling with money and you’ve done a little research, you’re probably aware that consumer proposals and debt consolidation are both options that can make your financial life easier moving forward. While this is true for many people – it’s also true that these options are very different – so it pays to understand more before you take your next step.

At a glance, debt consolidation combines multiple debts into one loan, simplifying payments and potentially lowering interest. A consumer proposal, on the other hand, is a legal agreement to pay a portion of your debt, offering reduced payments and relief from creditors – but impacting your credit more significantly than consolidation.

In this guide, we’ll take a more detailed look at how the different elements of debt consolidation loans and consumer proposals compare – as well as the next steps you can take if you’d like to learn more about either option and how it might work with your unique circumstances.

Debt Consolidation vs Consumer Proposal – How Do the Two Options Compare?

Debt consolidation loans and consumer proposals are both debt management tools, but they differ significantly in how they operate, their impact on your finances, and their effects on credit.

To help you compare, we’ll take a look at key factors in each – side-by-side so you can get a better feel of which is going to be best for you.

We’ll explore:

• What each option is and how it works
• Who’s eligible for each and what’s needed to qualify
• How each option impacts your debt
• How payments work for each each option
• The impact on your credit rating for both
• How each option impacts your assets
• The costs associated with each option
• The flexibility and and risk of both

When you’ve finished reading, you’ll have a better understand of how each could work for your finances.

What Are the Options, and How Does Each Work?

Debt Consolidation Loan

The primary goal of a debt consolidation loan is to simplify your debt by merging multiple balances into one loan, making it easier to manage.

You will need to request a debt settlement figure from each company you owe, the work out the amount of debt consolidation loan you need to pay each of these individual debts off.

As such, it doesn’t reduce the overall debt but may offer a lower interest rate than your current debts, making repayment more manageable. It’s best suited for people who have good enough credit to qualify for a favourable interest rate but who are struggling with multiple payments or high interest.

Consumer Proposal

A consumer proposal is a legal process where you negotiate to pay back a portion of your total debt, often less than what you owe.

It’s filed with the help of a licensed insolvency trustee and provides immediate relief from interest charges and collection actions. It’s designed for individuals who are unable to repay their full debts but wish to avoid bankruptcy.

Eligibility and Qualification

Debt Consolidation Loan

Approval for a debt consolidation loan depends on your credit score, income, and overall financial health.

If your credit is good, you’re more likely to secure a loan with a lower interest rate. Those with poor credit might still qualify but may face higher interest rates, potentially making consolidation less effective.

Consumer Proposal

No credit check is required to file a consumer proposal, and it’s available to anyone facing significant debt, as long as their total unsecured debts are between $1,000 and $250,000 (excluding mortgage).

This option is more accessible to individuals with poor credit or those struggling with insolvency.

The Impact on Debt for Each Option

Debt Consolidation Loan

A debt consolidation loan doesn’t reduce your overall debt load – you still repay 100% of your debt, but it may be easier to manage because of a single payment structure. If you can secure a lower interest rate, you could save on interest costs over time.

This type of loan is usually used to consolidate unsecured debts (like credit card bills, personal loans, payday loans, and similar) and often won’t be enough to cover secured debts – like mortgages, car finance payments, and similar.

Consumer Proposal

A consumer proposal allows you to negotiate with creditors to reduce the total debt owed. Typically, you’ll end up repaying only a portion of your debt, usually between 30% and 70%. Once the proposal is accepted, no further interest accumulates on the debt.

Like a consolidation loan, consumer proposals will help with unsecured debts – but are not suitable for dealing with secured debt.

Payment Structure

Debt Consolidation Loan

You make fixed monthly payments to repay the consolidation loan over a set period, which could be several years. The payment amount depends on the loan’s interest rate and term length, but the goal is to make the payments more affordable than the combined minimum payments on your previous debts.

Consumer Proposal

Payments in a consumer proposal are negotiated as part of the agreement. You agree to pay back a portion of your debt in monthly installments, typically over a period of up to five years.

Rather than making your payments to each financial institution you owe, you make one monthly payment to the LIT handling your proposal – who then distrubtes it between your creditors.

These monthly payments can be customized based on what you can afford, often making them more manageable for those with limited income.

What Impact Does Each Option Have on Your Credit?

Debt Consolidation Loan

Consolidating your debt can impact your credit score in different ways. Initially, applying for the loan might cause a temporary dip in your score due to the credit inquiry.

However, if you make regular, on-time payments, it can improve your credit over time by showing responsible credit management. Since the original debts are paid off, it may also lower your credit utilization ratio, another factor that positively affects your credit score.

Consumer Proposal

A consumer proposal has a much more significant and immediate negative impact on your credit. It is noted on your credit report as an R7 rating, which is a step above bankruptcy but still reflects a level of insolvency.

This rating stays on your report for three years after the proposal is completed (or six years from the filing date, whichever comes first). However, a consumer proposal can help you avoid the more severe consequences of a bankruptcy (R9 rating).

Assets and Legal Protections

Debt Consolidation Loan

A debt consolidation loan doesn’t offer any legal protection from creditors. If you’re struggling to make payments on the consolidation loan, you won’t have any formal protection from wage garnishments, lawsuits, or other collection activities unless you work out individual arrangements with creditors.

Additionally, consolidation loans are usually unsecured, meaning you don’t risk losing assets, but some people may choose secured loans, which can put property like your home at risk if you default.

Consumer Proposal

A consumer proposal provides immediate legal protection from creditors once filed. This means creditors must stop wage garnishments, lawsuits, and collection efforts as long as you stick to the agreed payments.

While bankruptcy may put some assets at risk, a consumer proposal allows you to keep all your assets (e.g., your home, car), as long as you stay current on payments like your mortgage or car loan.

Costs and Fees of Consumer Proposals and Debt Consolidation

Debt Consolidation Loan

There are usually no direct fees associated with a debt consolidation loan itself, aside from interest payments. However, some lenders might charge origination or administrative fees.

The main cost factor is the interest rate applied to your monthly payment, which can vary based on your credit score and lender.

Consumer Proposal

The cost of a consumer proposal is included in your monthly payments, and the trustee’s fees are regulated by the government – however, they’re usually competitive.

You won’t pay any upfront fees, but the trustee will take a percentage of the funds you repay to creditors. While this can make proposals seem costly, it’s often more affordable than repaying the full amount of your debt.

Flexibility and Risk

Debt Consolidation Loan

A debt consolidation loan offers more flexibility because it’s a private agreement between you and a lender. However, the risk is that it doesn’t address the root cause of debt, and if you fail to change your spending habits or income situation, you could end up accumulating more debt, compounding your financial difficulties.

Consumer Proposal

A consumer proposal is less flexible since it’s a formal, legal process, but it carries less risk for those facing insolvency. It addresses overwhelming debt by legally reducing it and offering structured, manageable payments. However, it limits your access to credit for several years.

Consumer Proposal vs Debt Consolidation: A Summary

Debt consolidation loans and consumer proposals both help manage debt, but they serve different needs.

A debt consolidation loan is better for those with good credit who want to simplify payments without reducing the debt, while a consumer proposal is suited to those struggling with insolvency, offering a legal way to reduce what they owe and gain protection from creditors.

Each option has trade-offs, from credit impact to cost and repayment structure, so choosing the right solution depends on your financial situation and long-term goals.

To work out which is the best option for you, a good next move is talking to either a LIT or a debt counselling service about your current debt payments and your unique circumstances.

Key Takeaways

• Debt consolidation simplifies debt by combining multiple loans into one, but you still repay the full amount owed, often with a lower interest rate.
• Consumer proposals reduce the total debt you repay, offering legal protection from creditors, but have a more severe impact on your credit score.
• Eligibility for debt consolidation depends on your credit score and financial health, while consumer proposals are accessible to those facing insolvency.
• Debt consolidation loans are flexible but don’t address underlying financial issues, whereas consumer proposals legally reduce debt but limit access to credit for several years.
• Both options can help manage debt, but the right choice depends on your financial situation, credit score, and long-term goals.