Should I Take Out A Loan To Pay My Consumer Proposal?

In a previous blog post, we discussed the pros and cons of paying off your Consumer Proposal early. Even if your financial situation has improved, leaving you with extra funds that you can use to pre-pay your Consumer Proposal, you may decide that it’s not worth pre-paying. For those who do want to pay it off early, some consider using a loan to do so. In fact, some lenders or debt advisors encourage people who have made a Consumer Proposal (or are considering doing so) to go this route. In this case, there are additional factors to consider before deciding to pre-pay the proposal using a loan.

Using a Loan to Pay Your Consumer Proposal Early

Some lenders offer special loans designed for individuals currently in a Consumer Proposal. These are often marketed as “proposal exit loans” or “credit rebuilding loans.” In theory, you borrow enough money to pay off your proposal in full, and then you repay the lender over time… with interest.

The pitch offered by these lenders is usually something like: You pay off your proposal early, improve your credit score faster, and start fresh with a new loan that helps you build a positive repayment history which further boosts your credit score.

The reality is more complicated than that. Consider the following:

There are some potential benefits to using a loan to pay your Consumer Proposal out early:

• Faster Credit Rebuilding: Paying off your proposal early can shorten how long it remains on your credit report. A completed proposal stays on your file for three years after completion, to a maximum of six years from the filing date. So, if you finish your payments faster, the three-year clock starts sooner. The overall number of years it will stay on your report will only be decreased if you can pay it off sooner than three years from filing, but even having it show as completed vs in progress can be beneficial. In addition, the loan will be reflected on your credit report, generating new credit history. If you are able to keep up with the re-payment terms of the loan, this new credit history may reflect positively on your credit-worthiness in the eyes of other potential lenders.
• More Manageable Payments: A new loan might have more flexible re-payment terms than your proposal, especially given that proposal terms typically require payment over no more than five years. And proposal terms are set in stone at the time you file the proposal, such that failure to adhere to the terms can result in the proposal being automatically annulled, while it may be possible to work collaboratively with the new lender to make arrangements if you are struggling to adhere to the new loan’s terms.
• Psychological Relief: Some people just feel better, or are less worried about possible repercussions, knowing they have completed their proposal and are no longer involved in an insolvency proceeding.

There are some very important downsides to using a loan to pay your Consumer Proposal out early:

• High Interest Rates: Many of the lenders offering these loans charge high interest—often in the 20–40% range. That’s a huge jump from the 0% interest typical in a Consumer Proposal, meaning you will pay significantly more overall by taking out a loan to re-pay the Consumer Proposal.
• Fees and Hidden Costs: Some loans come with origination fees, insurance add-ons, or early repayment penalties. These can sneakily inflate the total cost of borrowing even further.
• Doesn’t Automatically Improve Your Credit: Completing your proposal early can start the clock sooner on rebuilding your credit score. However, there is a risk that taking on new high-interest debt can offset that gain, especially if payments are missed or balances remain high. Taking out a new loan could actually hurt your score in the short term if you're not careful with repayment or if your debt load increases. There is no guarantee you will be better off from a credit-score perspective by taking this route, and anyone who claims to provide such a guarantee should be approached with caution.
• More Debt Risk: By using a loan to pre-pay your Consumer Proposal, you’re essentially swapping out an approved plan of arrangement for a new loan with added interest and pressure. If you run into problems complying with the terms of the new loan, you could be right back where you started, dealing with unmanageable debt with a new lender that may or may not be easy to deal with.

Warning: Be Cautious With “Credit Repair” Companies

There are companies out there that aggressively market loans to people in Consumer Proposals. They often frame it as “fixing your credit” or “getting out of the proposal faster,” but many charge fees for services you don’t need—or that your LIT can help you with for free.

If someone promises to “get you out of your proposal” but doesn’t clearly explain the costs and risks, proceed with caution.

Key Questions to Ask Yourself Before You Use A Loan To Pre-Pay Your Consumer Proposal

Before you say yes to any loan, take a moment to ask yourself the following:

• What are the fees and interest being charged for the loan? Are the rates reasonable?
• When taking into account fees and interest, how much will I pay overall by the time I’ve paid off the loan, and how does this compare to the amount I’d pay in my Consumer Proposal?
• Are there other options available to pay my proposal out sooner?
• Exactly how will doing this help me achieve my financial goals?
• Am I truly ready, financially and psychologically, to take on a loan again?
• Am I doing this because I truly understand the benefits, or because I’m being pressured by a lender or a credit repair company?
• What promises has the party offering the loan made, and are those promises realistic?
• Have I talked to my LIT about my options?

That last point is a big one. If you are in a Consumer Proposal, you will already be working with an LIT. Your LIT is a great resource to help you make informed choices, not just at the start of your proposal but throughout the process. They can help you decide whether it makes sense to take on a loan to pre-pay your proposal.

Final Thoughts: Know What You’re Trading

In some cases, taking out a loan to pay off a Consumer Proposal early can be beneficial, especially if the loan has a low interest rate and manageable terms. However, it’s crucial to weigh the risks carefully. If the loan has a high interest rate or puts you in a worse financial situation, it may be best to stick with your original Consumer Proposal plan. A Consumer Proposal is designed to give you a safe, structured, typically-interest-free path out of debt. Taking out a loan to end it early might sound appealing—but only if the math (and the risk) works in your favor.

Before making a decision, consult with your Licensed Insolvency Trustee or a financial advisor to evaluate your options. They can help you determine whether an early payoff is in your best interest and whether a loan is a wise choice.

Charla Smith & Company is a Calgary-based Licensed Insolvency Trustee, serving the Alberta region. We regularly help individuals consider their options and, where appropriate, file a Consumer Proposal. If you'd like to explore your options, please reach out to us.

Disclaimer: This publication provides general information and should be seen as broad guidance only. The information contained herein cannot be relied upon to cover specific situations and you should not act, or refrain from acting, upon this information without obtaining specific professional advice relating to your particular circumstances. Charla Smith & Company Ltd. does not accept or assume any liability or duty of care for any loss arising from any action taken or not taken by anyone in reliance on the information in this publication or for any decision based on it.