Finance companies are offering loans to people who are in a consumer proposal. The pitch can be, “use your car or house as security for a loan to pay off your consumer proposal.” We’ve also seen the entrance of new players into this space, including a new FinTech company Marble Financial, offering to help people in a consumer proposal rebuild credit with a Marble Financial Fast Track Loan to payout a consumer proposal early.
Is this a good idea? Perhaps, but only in very specific circumstances.
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Advantages of Borrowing to Pay Off a Consumer Proposal
Improved Credit Report
A note indicating you filed a consumer proposal will remain on your credit report for three years after you make your final payment, or six years in total (on your Equifax credit report). If your proposal takes five years to complete, the note remains on your credit report for a total of six years. If you can borrow to pay off your proposal after two years, the note disappears after five years, so your credit report looks “cleaner” much sooner.
Improved Credit Score
If you have debt and pay it on time, your credit score will generally improve. While you are in a consumer proposal you have no unsecured debt; by getting a loan to pay off your consumer proposal, you now have debt, and as long as you are making your payments, your credit score may improve.
Peace of Mind
By paying off your consumer proposal early, you know that there is no chance that you will default on your proposal payments. Federal law states that a consumer proposal is automatically annulled if you fall three months behind in your payments. By paying it off early, there is no chance that you will miss any future payments, and that’s great peace of mind.
Sounds great. So what’s the problem?
Disadvantages Of Using A Loan For Proposal Payments
High Interest Costs
The most obvious disadvantage of borrowing while you are in a consumer proposal is that your credit score isn’t great, so you are likely to pay a high interest rate.
Let’s assume you have $10,000 left owing to complete your proposal, and a finance company is willing to lend you $10,000, secured by your car or house. They will likely require a high interest rate to compensate them for the risk of lending to someone who has not yet completed their proposal. If the interest rate is 20%, is it worth paying an extra $2,000, or $4,000 or whatever it will take in interest and fees to pay off your proposal early?
Only you can answer that question, but always remember that there is no interest on your consumer proposal; so by borrowing you are paying more, perhaps a lot more, than you would pay to simply complete your proposal as scheduled.
Back in Debt
You filed a consumer proposal to eliminate debt. Do you want to go back into debt to finish your proposal early? Doesn’t that somewhat defeat the purpose of filing a proposal?
By borrowing, you have now put yourself at risk of default. If you pledge your car as security, and you can’t make the payments on your new high interest loan, you now risk having your car repossessed. Is that a risk you are willing to take?
Equifax maintains information about most debts, the filing of a consumer proposal, for a maximum of six years. So if you are already four years into your consumer proposal, if you pay it off over the next year, the note disappears in another year (six years from the start of the proposal). If at the four year mark you get a loan to pay off the proposal, and it takes you a year to pay off that loan, the note about that loan stays on your credit report for six years, so you have “restarted the clock”, which may not help your credit score. Paying off your proposal early by accelerating your payments may be better for your credit score than taking on new debt.
Crunch The Numbers
Here’s my advice: You should only consider getting a loan to pay off your proposal early if there is a very compelling reason to borrow. Perhaps your parents are willing to co-sign a loan for you, and they can borrow at very low interest; so financially it makes sense. Perhaps you want to buy a house in a few years and you want to start rebuilding credit immediately, and for you it’s worth the extra interest cost.
That may be true, but let me give you a word of caution: Everyone (but you) makes money if you borrow. Obviously the lender makes money, but here’s something you may not have considered: your consumer proposal administrator (that’s me) also wants you to pay off your proposal early, because then I get paid early. A Consumer Proposal Administrator is paid a percentage of the funds that are distributed to the creditors, when the money is distributed. So, if you pay off the proposal early, the creditors get paid early, and I get paid early.
That’s great for me, but is it great for you? Again, only you can decide.
3 Better Ways To Pay Off Your Proposal Early
I agree that you should pay off your proposal as quickly as possible, but I’m not a big fan of borrowing to do it, because of the interest cost. Here are some tips for paying off your proposal early, with no interest:
- Increase the amount of your payments. If you are currently paying $400 per month in your proposal, increase your payment to $425 per month. You probably won’t miss the extra $25, but you will pay off your proposal faster, with no interest.
- Increase the frequency of your payments. Instead of paying $400 per month, switch to weekly payments of $100 (if you get paid weekly), or bi-weekly payments of $200 per month (if that matches your paycheque). Paying based on your paycheque frequency makes budgeting easy, you won’t miss the extra payment, and your proposal will be done faster.
- Make a lump sum payment. Did you get a bonus at work? A tax refund? A gift? Use some or all of that money to make a one-time, lump sum payment to pay off your proposal faster.
We all worry about losing our job or having our hours reduced, so paying off your proposal early eliminates the risk that you won’t be able to continue to make your payments. Whether or not you should borrow to do it is up to you, but consider all options before incurring any additional debt.