Are struggling with a lot of consumer debt and are finally sick and tired of being behind every month, you might be looking for a course of action to get yourself out of that mess once and for all. Two popular tools to help Canadians deal with their debt are consumer proposal and debt consolidation. But how do you know which option is best for you? Both options have their pros and cons, so here we will explain some of the differences in order to help make your decision a little bit easier.
What is Consumer Proposal?
A consumer proposal is a legal agreement with your creditors. It is a plan whereby your creditors agree to lower the amount that you have to repay and there is a fixed monthly amount that you will have to pay until the agreed amount is fully paid off.
This is a popular alternative to bankruptcy because consumer proposal does not require you to give up any of your assets. Like bankruptcy however, a consumer proposal will hurt your credit rating and a record of it will remain on your credit report for seven years. This could cause you to be turned down by lenders should you require another loan during this time period.
When Should You Use Consumer Proposal?
Knowing that a consumer proposal will hurt your credit, it is something you should only use when you are in dire circumstances. This includes when:
- You already have severely damaged credit.
- You would not be able to afford repayments on a consolidation loan.
- Creditors are calling your home.
- Your wages are being garnished.
- Liens have been placed on your home.
- You owe a lot of money to CRA.
What is Debt Consolidation?
A debt consolidation is when you take out one large loan in order to pay off all your other smaller loans. The loan could be unsecured such as a personal line or credit, or it could be secured against the equity in your home such as a second mortgage, HELOC or refinancing.
The advantage of using the equity in your home is that the interest rate will typically be much lower, allowing you to pay off the debt more quickly.
When Should You Choose Debt Consolidation?
The time to choose debt consolidation is before you get into desperate circumstances. You should choose this route if your credit is good enough to get the loan and if you can afford the minimum payments.
With debt consolidation, you will still be paying off the full amount but with lower interest rates and fewer creditors to pay, you will be doing it in a smarter way. Also, most of the time, a debt consolidation is not going to do any further damage to your credit.
Finally, The most important thing is that a consumer proposal is a legal agreement approved by and the courts, while a debt consolidation is completely voluntary.
Debt consolidation with a strong debt management plan proves to be a worthy option in most cases. If you are struggling with debt and would like to discuss your options, call the team at Akal Mortgages today.