There are many reasons why you might be struggling to pay your debts. Maybe you don’t have a stable income or you just didn’t know how to manage your finances and ended up with high credit card bills. Either way, we are sure that you dream of clearing up all your debt and start fresh. Luckily, through debt consolidation or consumer proposals, you will be able to settle down all your debts. But, how can you choose the best one for you? To help you, in this article, we will compare consumer proposals vs debt consolidation.
Choosing debt consolidation vs consumer proposal might be a difficult decision since they both offer to pay up all your debt. However, depending on your financial situation and the requirements of these methods, one could be better than the other.
Since these methods have different approaches to debt consolidation, we will explain how each one works. Plus, tell you the pros and cons of choosing either of them. That way, in the end, you will have all the tools you need to pick your ideal path.
What is Debt Consolidation?
Usually, debt consolidation is the first thing that debtors think about. This doesn’t mean that is the best option in every case but, it is the most common one. When you choose debt consolidation, you can unify all your debts into just one bill. If you are smart enough, you will do it before you are drowning in debt. That way, your lenders will be able to refinance the high interest of your debts.
Even though this sounds great, it is not available for everyone. If you want to apply for debt consolidation, you will need an excellent credit score and a low debt service ratio. In this regard, there are various alternatives for debt consolidation. The majority of people choose a dedicated debt consolidation service but you could also combine multiple loans through a home equity loan and achieve a lower interest rate.
What is a consumer proposal?
Consumer proposals and debt consolidation are similar, in the sense that both will allow you to reduce monthly payments. However, a consumer proposal will also disappear the interests and reduce the overall amount of your debt. This means with a consumer proposal you will pay your debt with zero interest.
When you apply for a consumer proposal, you will work out an agreement, in which you will only pay for a portion of what you own. That’s why this is a great option for anyone who doesn’t have enough money to pay for the total debts combined. Keep in mind that your debts include credit cards, personal loans, lines of credit, among others.
Debt Consolidation vs Consumer Proposal: The Difference
Debt consolidation is an option that allows you to combine several small debts into one. This loan also offers lower interest rates and an affordable monthly bill. On the other hand, you will eliminate the interest and reduce your overall debt with a consumer proposal.
If you are still not sure about which option is the best for you. Here are the pros and cons of each one.
Debt Consolidation: Pros and Cons
Debt consolidation is only a possibility when you meet the conditions of the lenders. This means that you should have a debt service ratio equal or less to 35 percent. To calculate your debt service ratio, your lender will take into account your gross income and the total you owe. Plus, a good credit score. These conditions reduce the number of people who can apply for debt consolidation. If this is your case, here are the pros and cons you should keep in mind.
Here are some reasons why you should choose debt consolidation.
- The high-interest rates will be reduced. This means that in the long run, you will be paying less.
- When choosing debt consolidation, you won’t have to worry about your credit rating since it would be left intact.
- There won’t be any debt left because the loan will help you cover the full amount you owe including, credit cards and personal loans, among others.
- You can get a consolidation loan using the real estate asset you have.
- The monthly payments will be calculated depending on your financial situation, making them affordable.
Even though debt consolidation has many advantages, there are some cons to keep in mind.
- When you get a debt consolidation loan, you are allowed to keep credit cards or personal lines of credit with high-interest rates. This means that if you keep using those, your debt will only get worse.
- To secure a debt consolidation loan, you will have to put a major asset as a backup. In case you start missing your monthly payments, your asset could be seized.
- If you sign a debt collection loan that you can’t afford, you’ll only delay the efforts to be debt-free.
Consumer Proposal: Pros and Cons
Consumer proposal, as we explained before, makes more sense when you don’t have enough income to cover all your debts, plus the interest rate. Also, in some cases, the debtors might have a stable income but be unable to pay their bills on time. Another possible instance in which you might consider a consumer proposal is if your bad credit rating doesn’t allow you to apply for debt consolidation.
If you have decided to get a consumer proposal, here are the advantages.
- You won’t have to compromise your assets since you won’t have to put them as a backup for a loan.
- The repayment plan you agree to will be debt-free.
- You will have the possibility to discharge up to 75 percent of your total debt.
This option offers many benefits, but there are also some disadvantages you need to take into account.
- A consumer proposal will only help you with unsecured debts. Mortgages and car loans are excluded from the agreement.
- Your rating score will change since there will be a discharge of a portion of your debts.
Consumer Proposal vs Debt Consolidation: Conclusion
If you are struggling to pay your debts, either a consumer proposal or debt consolidation can help you out. However, depending on your financial situation, one of these options could be better for your case. Also, remember to consider how this will impact you in the long term.