If you’re currently working through a consumer proposal, you might be wondering: can you pay it off early? The short answer is yes. But is it the right move for you? Paying off a consumer proposal ahead of schedule can open doors to faster financial freedom and better credit, but there are also some important factors to think about before taking the plunge.
Let’s break down the benefits, potential drawbacks, and what you must consider for early repayment.
Understanding Consumer Proposals
What Is a Consumer Proposal?
A consumer proposal is an efficient debt relief option that helps you repay part of what you owe while keeping your assets intact. Overseen by a Licensed Insolvency Trustee (LIT), it’s essentially a legally binding agreement between you and your creditors. You agree to pay back a portion of your debts over time, and in exchange, all collections efforts, like wage garnishments or other legal action, cease.
Key Features of a Consumer Proposal
Here are some quick highlights:
- You pay back less than what you owe in manageable monthly installments.
- It gives you up to five years to pay it off.
- It halts collection actions from creditors as soon as it’s filed.
- When you have fulfilled the obligations of the proposal, you get a certificate of completion, officially eliminating the remaining eligible debt.
It’s a structured way to tackle your debts without bankruptcy, making it a popular choice for many Canadians.
ALSO READ: 7 Things You Need to Know About a Consumer Proposal
Benefits of Paying Off a Consumer Proposal Early
Accelerated Debt Freedom
The sooner you pay it off, the sooner you’re free from those monthly payments. Early repayment can feel like a weight lifted, giving you the freedom to focus on other financial goals.
Enhanced Credit Rebuilding
A consumer proposal stays on your credit report for six years after the agreement is signed or three years after it is paid off, whichever comes first. So, the earlier you complete it, the sooner that clock starts ticking. This can make a big difference for anyone looking to rebuild their credit score.
ALSO READ: How a Consumer Proposal Affects Your Credit Report
Improved Financial Flexibility
Imagine having one less debt obligation to worry about. By paying off your consumer proposal early, you free up money in your budget to put toward other goals—like boosting your savings or paying down other high-interest debts. It can also improve your debt-to-income ratio, which is helpful if you consider applying for a mortgage or car loan.
Ways to Pay Off a Consumer Proposal Early
Increasing Payment Amounts
Increasing your monthly payments is one straightforward way to pay off your proposal early. Even a small bump in your payment amount can add up over time and shorten your repayment period.
Adjusting Payment Frequency
Another simple trick is to switch to bi-weekly payments instead of monthly ones. This method sneaks in an extra payment each year, helping you chip away at the balance faster without making considerable changes to your budget.
Making Lump-Sum Payments
Did you get a bonus, tax refund, or other unexpected cash? Putting that money toward your consumer proposal as a lump-sum payment can make a massive dent in your remaining balance—or even pay it off entirely.
Factors to Consider Before Early Repayment
Financial Stability
Before deciding to pay off your consumer proposal early, take a close look at your financial situation. Do you have enough savings to cover emergencies? Clearing your debts is great, but not if it leaves you vulnerable to unexpected expenses.
Opportunity Cost
Could that money be used for something like investing in a retirement fund or tackling higher-interest debts? Weigh the benefits of early repayment against other potential gains to ensure you get the most bang for your buck.
Credit Report Implications
While paying off a consumer proposal early is a step in the right direction, it doesn’t instantly erase it from your credit report. It will stay on your file for three years after completion, so be realistic about when you’ll see improvements to your credit score.
Potential Drawbacks of Early Repayment
Depleting Emergency Savings
Using your emergency fund to pay off the proposal might be tempting, but this can leave you in a tough spot if unexpected costs pop up. Always prioritize having a safety net for the unexpected.
Costs of Borrowing
If you’re considering taking out a loan to pay off your proposal, watch out for high interest rates. The cost of borrowing might outweigh the benefits of early repayment, so make sure you crunch the numbers.
Minimal Immediate Impact on Credit
Even if you pay off your consumer proposal early, the mark on your credit report remains for three years. It is important to set realistic expectations and focus on long-term strategies for improving your credit.
Steps to Take After Paying Off Your Consumer Proposal
Obtain a Certificate of Full Performance
Once your consumer proposal is paid off, your Licensed Insolvency Trustee will issue a certificate confirming completion. This is your proof that the process is officially done, so be sure to keep it handy.
Notify Credit Bureaus
Contact Equifax and TransUnion to ensure your credit report reflects the updated status. Regularly reviewing your credit file can help you spot and fix any errors.
Engage in Credit Rebuilding Activities
Start rebuilding your credit using tools like secured credit cards or small loans. Make timely payments and keep your balances low to establish a positive track record. Consistency is key here.
Final Thoughts
Paying off a Consumer Proposal early can offer real benefits, from faster financial freedom to quicker credit recovery. But it’s not a one-size-fits-all decision. Take the time to assess your financial stability, weigh your options, and consider how this move fits your overall financial goals.
If you’re unsure, reach out to a professional for guidance. At Chande Debt Solutions, we’re here to help you navigate your options and make informed choices.
The experienced Licensed Insolvency Trustees of Chande Debt Solutions are focused on personal debt relief and insolvency services. We know that filing a consumer proposal or bankruptcy is a serious matter, and we want to ensure that you are well informed and don’t rush into any solutions. All of our consultations are free, without time limits.
Call us today at 416-366-3328 or fill out our convenient online form to learn how we can help you recover financially.
