Personal Finance

Consumer Proposal - Should I Pay It Off Now?

  • Last Updated:
  • Dec 22nd, 2020 1:43 pm

Poll: Should I Pay Off My Consumer Proposal Now?

  • Total votes: 17. You have voted on this poll.
YES
 
16
94%
NO
 
1
6%
[OP]
Member
Oct 8, 2020
222 posts
319 upvotes
Ottawa

Consumer Proposal - Should I Pay It Off Now?

I have a question for all of you. I am 2 years into my 5-year consumer proposal. Obviously I can pay it off whenever I want without penalty. A couple months ago, I came into a financial windfall with enough to pay off the proposal in full with enough leftover for a rainy day. My friend is a financial advisor. She believes I should lock in my windfall in an investment instead of paying off the proposal. I told my friend that the sooner my proposal is paid off than the sooner my credit recovers. My friend says my credit is screwed anyways, what's another couple years?

My trustee admits he's biased. He says the sooner I pay off the proposal, the sooner he gets paid. He admits there are an equal amount of pros and cons for both options. Therefore I turn to RFDers. Pay off the proposal in full since I have the cash or invest the money?
22 replies
Member
Dec 13, 2010
229 posts
253 upvotes
Vancouver
Can you provide some more details such as:
What's the interest you pay on your consumer proposal?
How much would you have leftover if you paid it off now?
What's your investment time horizon?
What is your risk tolerance for investing (eg do you have an allocation of equity to fixed/bonds in mind?)
[OP]
Member
Oct 8, 2020
222 posts
319 upvotes
Ottawa
mastaj wrote: Can you provide some more details such as:
What's the interest you pay on your consumer proposal?
How much would you have leftover if you paid it off now?
What's your investment time horizon?
What is your risk tolerance for investing (eg do you have an allocation of equity to fixed/bonds in mind?)
My consumer proposal is $8,400 and there is no interest nor is there a penalty for paying it off sooner. I owe $4,800 and if I did, I'd have about $3,000 leftover. I have medium risk tolerance.
Member
Dec 13, 2010
229 posts
253 upvotes
Vancouver
SenatorsFan wrote: My consumer proposal is $8,400 and there is no interest nor is there a penalty for paying it off sooner. I owe $4,800 and if I did, I'd have about $3,000 leftover. I have medium risk tolerance.
I think in your case, the answer is going to be more emotional than pure mathematics.

Since your consumer proposal does not charge any interest, it is likely that you will do better financially if you invest the lump sum. At a medium risk tolerance if you anticipate even a 4% to 5% return on investing, you will have more money in the long term if you invest the full amount and just continue to pay off your consumer proposal as you have been. Much better if you can afford to leave your investments alone for 15 - 20 years (so don't just look at what you will have after 3 years once your consumer proposal is paid). Even if you went very conservative and put everything into a high interest savings account of 1.5%, you will end up better off by investing instead of paying down a zero percent debt.

Having said that, there are benefits to paying off the debt. A lot of that is emotional and behavioural. Would it give you significant peace of mind to have the consumer proposal paid off and finished? That can be more valuable to you personally than having slightly more funds in your bank account. Also, do you trust yourself to be able to continue payments over the next 3 years, or would you be better off using the money you have now to ensure you clear your obligations?

If it was me, I would invest the lump sum - but I have a long term investing mindset, am comfortable with risk, and am ok with some debt. That is just my own personal perspective, and you will have to decide which is the better option for you. Hope that helps!
Newbie
Apr 10, 2009
73 posts
18 upvotes
Vancouver Island
Your consumer proposal is a very small amount. I would pay it off myself. The faster you pay your proposal more quickly, your credit rating will improve in less time.

Transunion and Equifax will remove the notation of a consumer proposal from your credit report three years after the proposal has been completed or six years from the proposal filing date, whichever is earlier.

We had a large CP ($860 a month for 5 years). Paid it off in 6 months and it's been almost 4 years now and we have great credit again.

But that's just me. Everyone has different goals.
Deal Fanatic
Apr 5, 2016
5197 posts
3702 upvotes
Calgary/Vancouver
I also agree with paying off. Your debt is not much and the sooner you pay off, sooner it drops off your credit bureau which is way more beneficial than earning 4-6% on $8600 a year.
Newbie
Nov 6, 2017
23 posts
4 upvotes
I'd also pay off the cp..earning 4-6% on this type of money isn't worth the negative effect on your credit nor the space in your head thinking of the debt.jmho
Newbie
Jan 7, 2017
22 posts
13 upvotes
The best option is to pay it off. It comes off your report in 3 years, and your credit will improve within those 3 years. If you wait until the end, it will take additional 2 years for CP to come off the credit report. One thing to remember is that derogatory or account included in CP stay for 6 years, so if you want, you can delay it till the end of the third year.
Deal Expert
User avatar
Feb 8, 2014
19733 posts
7233 upvotes
Socially Distanced
If you pay it off and invest the monthly savings you should not be off by that much in the end but your credit gets fixed sooner.
That said how did you get into this debt and can you trust yourself not to do it again?

Often people pay off their credit cards with a LOC or reverse mortgage. Then run those credit cards up again so are in fact not better off at all, they now have two debts. If this is you then clearing up your credit means more loans and more debt in the end.
In fact in Rand McNally they wear hats on their feet and hamburders eat people
Deal Fanatic
Apr 16, 2007
7979 posts
3270 upvotes
Financial District B…
The quicker you complete your your CP and get discharged from it the quicker you can start rebuilding your credit again.
----------------------------Licensed Credit Bureau member, S1, FI Automotive, CCP forums most banned = x 13 and counting, guess who that is?... stomped to the curb once again
Sr. Member
Feb 18, 2019
514 posts
664 upvotes
Pay off the debt and start rebuilding your credit. $8,400 is not worth multiple more years of ruined credit.
Deal Fanatic
User avatar
Aug 24, 2016
8044 posts
8467 upvotes
The Prairies
License To Chill wrote: Your consumer proposal is a very small amount. I would pay it off myself. The faster you pay your proposal more quickly, your credit rating will improve in less time.

Transunion and Equifax will remove the notation of a consumer proposal from your credit report three years after the proposal has been completed or six years from the proposal filing date, whichever is earlier.

We had a large CP ($860 a month for 5 years). Paid it off in 6 months and it's been almost 4 years now and we have great credit again.

But that's just me. Everyone has different goals.
I have zero knowledge of CP, but 860 a month for 60 months is just shy of 52k.
If you had the ability to pay 52k in 6 months, why wouldn’t you have just paid that amount towards the debt, instead of doing a CP?
Sr. Member
Jul 23, 2015
803 posts
578 upvotes
Hamilton, ON
coolintheshade wrote: I have zero knowledge of CP, but 860 a month for 60 months is just shy of 52k.
If you had the ability to pay 52k in 6 months, why wouldn’t you have just paid that amount towards the debt, instead of doing a CP?
52k would be the "settled " so probably over 100k debt maybe even 150-200k
[OP]
Member
Oct 8, 2020
222 posts
319 upvotes
Ottawa
Quentin5 wrote: If you pay it off and invest the monthly savings you should not be off by that much in the end but your credit gets fixed sooner.
That said how did you get into this debt and can you trust yourself not to do it again?

Often people pay off their credit cards with a LOC or reverse mortgage. Then run those credit cards up again so are in fact not better off at all, they now have two debts. If this is you then clearing up your credit means more loans and more debt in the end.
Here's the thing, payments on my student loans have stopped during my proposal although interest has been accumulating. Once I pay off the proposal, my student loan payments would start up again. Those payments are about $20/more monthly than my proposal. So paying off my proposal won't free up cashflow so I could invest it but it would allow me to restore my credit 3 years sooner and put the money I was spending on proposal towards my student loans and in essence allow me to pay off my student loans 3 years earlier.

I would not be borrowing money to pay off my proposal. I've come into 'found money' through a small settlement with the City of Ottawa. In terms of how I got into this debt? Gambling addiction, plain and simple! Wracked up $30,000 in credit card debt and payday loans over about 5 years. I've been in addictions counselling since entering into my consumer proposal and haven't gambled since (not even a scratch ticket). I've also had a $1,000 secured credit card for over a year, haven't come close to maxing it out, pay it off in full every month. I have a budget notebook. I make a monthly and bi-weekly budget, I also write down everything I spend and keep all my receipts. I also check-in with a financial services manager at my bank every few months. Do I trust myself to not do it again? I'm much happier and less stressed out and I think I'll feel even more relief once the proposal is paid off. I'm optimistic I have the skills and tools I need to avoid getting into a financial mess like this again.
Deal Expert
User avatar
Feb 8, 2014
19733 posts
7233 upvotes
Socially Distanced
SenatorsFan wrote: Here's the thing, payments on my student loans have stopped during my proposal although interest has been accumulating. Once I pay off the proposal, my student loan payments would start up again. Those payments are about $20/more monthly than my proposal. So paying off my proposal won't free up cashflow so I could invest it but it would allow me to restore my credit 3 years sooner and put the money I was spending on proposal towards my student loans and in essence allow me to pay off my student loans 3 years earlier.
How much is your student loan debt and what is your annual income? Also how secure is your job? Are you full time if you are working?
People love to have a great credit rating. And it is very useful when you need a loan for a car or a mortgage but on the flip side allows you to get into plenty of other debt, as you mention below not so good debt as well.
I do not think fixing your credit rating as fast as possible should be your goal here. Yes i know that goes against conventional thinking.

If your proposal has no interest then in general don't worry about paying it off quicker. Your student loan (is it your only other debt?) is growing.
Depending on your income, necessary expenses and amount of all other debts you should look at what makes your entire financial picture work out the best long term instead of thinking about your credit rating.
So with what i know so far i cannot give you advice yet, i would need more information.
I would not be borrowing money to pay off my proposal. I've come into 'found money' through a small settlement with the City of Ottawa. In terms of how I got into this debt? Gambling addiction, plain and simple! Wracked up $30,000 in credit card debt and payday loans over about 5 years. I've been in addictions counselling since entering into my consumer proposal and haven't gambled since (not even a scratch ticket). I've also had a $1,000 secured credit card for over a year, haven't come close to maxing it out, pay it off in full every month. I have a budget notebook. I make a monthly and bi-weekly budget, I also write down everything I spend and keep all my receipts. I also check-in with a financial services manager at my bank every few months. Do I trust myself to not do it again? I'm much happier and less stressed out and I think I'll feel even more relief once the proposal is paid off. I'm optimistic I have the skills and tools I need to avoid getting into a financial mess like this again.
I'm so sorry to hear about the gambling but glad you have made a very excellent turnaround from it. But these things are not easy to escape. Once the genie is out of the bottle putting it back in is very difficult. Even when you think you have done it you can slip later rather easily. So keep doing what your doing but don't become complacent.
That said its good to hear you are doing this well, be very proud of that.

All that said your ultimate goals should be to save for a rainy day, pay off all your non mortgage debts, save and invest for retirement and rebuild your credit rating. In that order.

If you can provide the extra information i requested i can give you better thoughts on how to allocate your money right now.
In fact in Rand McNally they wear hats on their feet and hamburders eat people
Deal Addict
User avatar
May 31, 2003
3051 posts
276 upvotes
Toronto, ON
For sure pay it off. I think the 3-year recovery period from a consumer proposal begins the day it's paid off - so delaying it is also delaying how fast your credit recovers.
"The crows seemed to be calling his name, thought Caw." - Jack Handey
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[OP]
Member
Oct 8, 2020
222 posts
319 upvotes
Ottawa
Chrispy wrote: For sure pay it off. I think the 3-year recovery period from a consumer proposal begins the day it's paid off - so delaying it is also delaying how fast your credit recovers.
For one of the credit reporting agencies, it stays on your credit report for 6 years from the day you filed or 3 years after you paid it off, whichever comes first. For the other one, it stays on for 3 years after you pay it off in full. I won't be getting the cheque from the City until January. Let's say I pay it off in full in January, then it would drop off of both credit reporting agencies by the end of 2024. If only made my regular payments, it would stay on with 1 of the bureaus until at least 2026.
Newbie
Apr 10, 2009
73 posts
18 upvotes
Vancouver Island
Nibbler2012 wrote: 52k would be the "settled " so probably over 100k debt maybe even 150-200k

This.

The reason we paid it off so fast was having no credit card payments for months..... then I won $25,000 on a BC Lottery ticket....cashed in a little RRSP's and done.
[OP]
Member
Oct 8, 2020
222 posts
319 upvotes
Ottawa
Spiritwalker2222 wrote: How much do you owe on your student loans?
$14,100. I'm legally not obligated to make payments on my student loans while I'm paying off my proposal although interest continues to accumulate.

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