Aiming to pay off your Consumer Proposal early? Here’s what you need to know

The good news is that you can pay off your Consumer Proposal early. Whether or not you should is an entirely different matter.

There are benefits to paying off your Consumer Proposal early. But do they exceed the potential pitfalls? Let’s take a look.

The benefits of paying off your proposal

First, and perhaps the biggest benefit of paying off your Consumer Proposal early, is that you can get a head start on rebuilding your credit. Additionally, when it comes time to renew your mortgage or lease, this fresh start can help you look like an attractive candidate.

You may even feel better emotionally. Your mind will feel a lot clearer without payments and debts weighing on you.

That being said, paying off a Consumer Proposal early does come with risk. The terms of your proposal have been designed to fit within your budget. They allow room for you to save for your future, in addition to making payments. You don’t want to overextend your finances just to pay off your proposal early.

So, before you pay it off, ask yourself the following questions:

Do you plan on using your emergency savings?

An emergency fund is money you’ve set aside for unexpected events like loss of employment, or major home and vehicle repairs. Using these savings to pay off your proposal is not recommended. It’s best to keep those funds safely tucked away for emergencies, while you continue to make payments based on the terms of the proposal.

What are your financial goals?

Setting financial goals around future vacations, retirement savings, major purchases, education, and lifestyle improvements is an important step toward financial success. Without outlining your financial goals, you may struggle to budget your needs and wants.

Paying off your proposal early, for instance, may be one of your financial goals.

Have you implemented a budget and stuck to it for at least three months?

Having a balanced and realistic budget is a key strategy for long-term financial success. Without this, you risk overspending and could potentially find yourself in debt again.

Before paying off your proposal, make sure you’ve been sticking to your budget and revising it as needed. If you are consistently over budget on your expenses, you’re likely not set up and ready to pay off your proposal.

Do you need credit right now?

Paying off your proposal early may help you rebuild your credit faster, but it could also put you in a position to be using credit before you’re ready.

If you need credit during your proposal period, consider secured of pre-paid credit products. These products use your own savings to grant you access to credit.

How do you plan to do it?

Do you have cash saved up to pay off your proposal or are you thinking of borrowing money?

If you choose to borrow, you risk high interest rates and repaying debt for as long as you would have in the proposal. Instead, put your savings to work for you and earn interest.

So, how do you pay off your Consumer Proposal early?

You’ve considered the criteria and want to pay off your Consumer Proposal early. You can make this happen by increasing the amount, or the frequency, of your monthly payments.

Perhaps you get a raise in salary and decide to increase your monthly payments. You may have saved funds to make a lump sum payment. You can use savings or tax refunds. Maybe you sold something and want to put the proceeds toward your proposal payments.

For instance, take a proposal agreement to pay $18,000 at a rate of $300 per month over 60 months. You’ve received a small pay raise at work and want to put some more money toward paying down your proposal. By increasing your payments to $370 each month, you’ll pay your proposal out in 48 months. That’s a whole year earlier than planned.

Alternatively, by increasing the frequency and paying $150 biweekly, instead of $300 monthly, you will pay off your proposal 10 months earlier than planned.

By paying an extra $1,000 a year in a lump sum payment, you could pay your proposal out in less than four years. You can make lump sum payments on a Consumer Proposal at any time.

It’s important to note that paying off your proposal early doesn’t result in a penalty. It also won’t accelerate the terms of your proposal.

Always keep an eye on the long game

In summary, it’s important to understand the nuances of paying off your Consumer Proposal. There are many ways to pay your proposal out early. And the sooner you pay it off, the sooner you can start to rebuild your credit.

Contact us for a free, confidential consultation to discuss your unique needs and learn how you can plan to pay off your Consumer Proposal today.

Leah Drewcock is Senior Vice-President and a Licensed Insolvency Trustee for British Columbia and the Yukon Territory.