Consumer Proposal vs Loan in Canada: How to Choose the Right Path

Struggling with debt can feel isolating, but you have options. In Canada, two of the most common paths are taking a new loan (often a consolidation loan) or filing a consumer proposal. Each has strengths and trade-offs—what works for one person may not be right for another. This guide breaks down the differences in plain language, using Canadian rules and real-world examples so you can choose confidently.

Why comparing consumer proposal vs loan matters in Canada

Comparing a consumer proposal vs a loan matters because they solve different problems. A loan reorganizes what you owe, while a consumer proposal reduces what you owe and protects you from collections. Interest rates, credit score impact, legal protection, and total cost can look dramatically different between these choices.

Before you decide, it helps to understand how each option actually works—legally, financially, and practically.

How consumer proposals work in Canada

A consumer proposal is a legally binding agreement under the Bankruptcy and Insolvency Act. You work with a Licensed Insolvency Trustee (LIT) to offer your creditors a partial repayment—usually over up to five years. If most creditors by dollar value accept the offer, all are bound by it. Collection calls stop, wage garnishments stop, and interest on included unsecured debts stops. Learn the full process in our guide to consumer proposals in Canada.

Advantages of a consumer proposal

• Debt reduction: You often repay less than the full balance of unsecured debts.
• Legal protection: The stay of proceedings stops lawsuits, collections, and most wage garnishments once filed.
• No interest on included debts: Interest stops, improving payment predictability.
• Keeps assets in most cases: Unlike bankruptcy, you typically retain your assets if you keep payments current.
• Fixed end date: On-time completion discharges remaining included balances.

Drawbacks and risks of a consumer proposal

• Credit impact: A consumer proposal is noted on your credit file; you’ll see an R7 rating and access to new credit will be limited for a time.
• Public record: It’s recorded in a public database under the Office of the Superintendent of Bankruptcy.
• Payment discipline required: Falling three payments behind can annul the proposal and restore creditor rights.
• Not all debts qualify: Secured debts and some obligations (e.g., child support) aren’t reduced.

How personal loans and consolidation loans work

A debt consolidation or personal loan rolls multiple debts into one payment, ideally at a lower interest rate and with a clear repayment term. Approval and pricing depend on your credit score, income, debt-to-income ratio, collateral, and lender policies. The Financial Consumer Agency of Canada offers neutral guidance on borrowing, budgeting, and credit reports—see the Financial Consumer Agency of Canada (FCAC) for consumer borrowing resources.

For a deeper look at how to consolidate, compare rates, and avoid pitfalls, see our expert guide to debt consolidation in Canada and saving on interest.

Benefits of taking a loan to manage debt

• Potentially lower interest vs. credit cards: Especially with good credit or collateral.
• Single monthly payment: Simplifies budgeting and reduces missed-payment risk.
• Can build credit: On-time payments can strengthen your credit profile over time.
• Flexible uses: Can address a mix of expenses if used responsibly.

Downsides and risks of loans

• No debt reduction: You still repay 100% of principal plus interest.
• Approval hurdles: If your score is low, rates may be high, or you may be declined.
• Risk of deeper debt: Consolidation frees up credit lines; if you reuse them, total debt can rise.
• No legal shield: Collections and wage garnishments do not automatically stop.

Consumer proposal vs loan: the key differences at a glance

Below are the practical differences most Canadians care about.

Interest, costs, and savings potential

• Consumer proposal: Interest on included unsecured debts stops. You repay an agreed portion of what you owe, which can significantly cut total cost. Learn how proposal pricing works in our guide to consumer proposal costs and interest treatment.
• Loan: You pay interest for the entire term. Your savings rely on qualifying for a competitive rate and avoiding new borrowing during repayment.

Credit score impact and recovery timeline

• Consumer proposal: Reported as R7 during the term and for a period after completion. With responsible habits, credit can recover; FCAC has guidance on credit reports and rebuilding.
• Loan: A hard inquiry and new account may cause a short-term dip; on-time payments may improve your score over time.

Legal protection, collections, and wage garnishment

• Consumer proposal: Triggers a stay of proceedings—creditors must stop collections and most wage garnishments.
• Loan: No automatic protection. If you’re already facing collections or legal action, a loan won’t stop it.

When a loan makes sense (and when it doesn’t)

Consider a loan if:

• Your credit score and income qualify you for a much lower rate than your current debts.
• Your total debt is manageable and you can repay in three to five years without stretching your budget.
• You’re confident you won’t re-accumulate balances on credit cards you consolidate.

A loan may not fit if you’re already missing payments, facing collections or legal action, or if the offered rates are high. In those cases, the total cost could exceed your current path.

When a consumer proposal makes sense

Consider a consumer proposal if:

• You can’t repay your unsecured debts in full without hardship, even after cutting expenses.
• Collectors are calling, your wages are at risk, or you need a legal pause to stabilize.
• You have mainly unsecured debts (e.g., credit cards, lines of credit, some tax debts) that could be reduced.
• You prefer a structured, interest-free repayment with a defined end date.

To explore how proposals compare with other legal options, review our complete guide to bankruptcy vs. consumer proposal.

Side-by-side examples: loan vs consumer proposal

These simplified scenarios illustrate how costs and timelines can differ. Your results will vary based on income, credit, province, and creditor responses.

• Scenario A: $35,000 in credit cards at high interest
  If you qualify for a 12% consolidation loan over 4 years, your monthly payment might be roughly $920–$930 and total cost about $44,000 (principal + interest). A typical consumer proposal might reduce total repayment to, say, $18,000–$22,000 over up to 5 years, with payments around $300–$370 per month and no interest on included debts.
• Scenario B: $50,000 mixed unsecured debt, collections started
  If you can’t qualify for an affordable-rate loan because of collections or poor credit, a proposal could halt collections and reduce the total to a more manageable repayment (for example, $250–$400 biweekly, depending on income and household situation). A high-interest loan here could be riskier and more expensive.

Note: These are examples, not quotes. Work with a professional for accurate numbers.

Costs and fees you should expect

• Consumer proposal: You don’t pay the trustee separately; regulated fees come from your monthly proposal payments and are set by federal rules. Your LIT will explain the cost breakdown before filing.
• Loan: You may pay interest, origination fees, and possibly insurance if you elect it. Compare the annual percentage rate (APR) rather than just the nominal interest rate to understand the true cost.

Protecting assets and dealing with tax debt

Consumer proposals typically allow you to keep assets as long as you keep secured payments current (e.g., car loan). For more on asset treatment, review what happens to your assets in a consumer proposal.

Regarding tax debt: Many Canadians don’t realize some Canada Revenue Agency (CRA) debts can be included in a consumer proposal. The CRA can take strong collection actions, including garnishment. For official information on tax debt and collections, consult the Canada Revenue Agency. If CRA debt is part of your situation, a proposal may provide structure and stop most collection activity once filed.

A simple step-by-step way to decide

1. Map your debts and cash flow: List all balances, rates, and minimums. Calculate your monthly budget and see how much you can realistically afford.
2. Check your credit: Review your credit report and score to gauge likely loan approvals and rates. See FCAC’s guidance on credit reports and scores.
3. Pre-qualify for a loan (without impacting credit, if possible): If the indicative rate isn’t much lower than your current weighted average, a consolidation loan may not save enough to be worth it.
4. Get a consumer proposal assessment: An LIT can estimate a feasible proposal payment and whether creditors are likely to accept.
5. Compare real totals: Line up total repayment under a loan (principal + interest + fees) versus a proposal (total payments). Include the value of legal protection and stress reduction.
6. Choose the option you can complete: The best plan is the one you can afford consistently without new borrowing.

Alternatives to explore beyond a loan or proposal

• Debt consolidation loan: If your credit qualifies and you can secure a much lower rate, it can be effective. For a deeper comparison, see consumer proposal vs. consolidation loan.
• Credit counselling/Debt Management Program (DMP): A non-profit agency may negotiate reduced interest with creditors. You repay 100% of principal but can save on interest. Compare this route in our debt consolidation guide.
• Bankruptcy: For severe insolvency, bankruptcy may be required. Understand the differences in our bankruptcy vs. consumer proposal guide.

What the latest Canadian data says

Household budgets are under pressure from elevated prices and borrowing costs. While the interest-rate environment can change, Canadians continue to carry significant consumer debt. For context on economic and household debt trends, consult Statistics Canada. To see how macro conditions are influencing debt relief choices, review our analysis of mid-year market trends in 2025 and how inflation affects consumer proposals.

Conclusion

Choosing between a consumer proposal and a loan starts with an honest assessment of your debts, income stability, credit profile, and stress level. If you can qualify for a low-rate loan and stay disciplined, consolidation can simplify payments and help rebuild credit. If you need legal protection and a reduction in total debt, a consumer proposal may provide the structured path forward you’ve been missing. Take the time to collect real numbers, compare total costs, and choose the approach you can confidently complete.