Consumer proposal vs debt consolidation in Canada

What does debt consolidation change?

Debt consolidation combines several balances into one borrowing product, such as a personal loan or line of credit. The objective may be simpler payments, a lower interest rate or a different repayment schedule. You still owe the new lender, and the terms need to work for your budget.

The FCAC warns that a longer repayment period can increase total interest, even when the monthly payment falls. A consumer proposal follows a different route: an LIT assesses your situation and prepares an offer through the insolvency process.

How the options differ

Compare offers using the same numbers

List the balances the loan would repay, then request the interest rate, payment amount, number of payments and all fees in writing. Check whether the rate is fixed or variable and whether the payment includes principal as well as interest. A line of credit requires particular attention to how the balance will actually fall.

For a proposal, ask for an individual illustration rather than applying a percentage discount to your debt yourself. Creditors' decisions and the treatment of your assets or excluded debts cannot be inferred from a generic online example.

Think carefully before securing old debts

If a lender proposes using home equity or another asset, ask what the security means if you cannot pay. The consequences are different from simply changing the rate on an unsecured account. Review both the repayment benefit and the asset risk before signing.

The FCAC explains borrowing against home equity. Bring any secured borrowing proposal to your adviser with the complete terms. Do not judge it only by the amount that would be deposited or the initial monthly payment.

Also decide how you will handle the old accounts after they are paid. If those balances build again while the consolidation loan remains, a simpler-looking arrangement can become a larger overall debt problem.

What if a lender declines your application?

A declined application is information about that lender's decision, not a verdict on your future. Before applying repeatedly or accepting a costly offer, review the whole budget and ask which other options are available. Be particularly careful with promises of guaranteed approval that obscure the rate or fees.

You may benefit from credit counselling, a discussion with creditors or an LIT assessment. A proposal is not automatically appropriate just because a consolidation product is unavailable.

Your written-offer checklist

• The balances being repaid and any debts left outside the arrangement.
• The total of scheduled payments, plus separate charges.
• The interest rate and conditions under which it could change.
• Whether the loan is secured and what asset is at risk.
• Whether payments reduce principal on the schedule you expect.
• What happens after a late payment or a change in income.
• The plan for avoiding new balances on the old accounts.

Compare the finished worksheet with essential living expenses and irregular costs. If it leaves a recurring shortfall, ask for another assessment rather than treating new credit as extra income. ConsumerProposal.ca provides education and does not offer loans, administer proposals or determine eligibility.