You Can Take Out a Payday Loan During a Consumer Proposal, But Don't Do It

By Julien Brault, founder of MooseMoney.

Some payday lenders will approve you for a loan while you are in a consumer proposal in Canada. They often skip credit bureau checks and only verify that you have a job and a regular paycheque. But taking on this debt is a serious mistake. Any new payday loan you take out during a consumer proposal will not be covered by that proposal, meaning you will owe the full amount plus interest on top of your existing repayment plan. You also risk breaching the legal rules that govern consumer proposals, which can carry real consequences with your Licensed Insolvency Trustee and your creditors.

A consumer proposal is a legally binding agreement filed through a Licensed Insolvency Trustee. It allows you to repay a portion of your unsecured debts over a period of up to five years. Filing one places an R7 rating on your credit report, which signals to lenders that you are making payments through a special arrangement. That rating stays on your credit report for three years after you complete the proposal or six years from the date it was filed, whichever comes first. During this time, most traditional lenders will view you as a high-risk borrower and decline your applications.

Payday lenders operate differently. Jeremy Kroll, Licensed Insolvency Trustee and Partner at Baigel Corp, explains how this plays out in practice. "Payday lenders often do not run credit bureau checks, so they might still lend you money even if you are not discharged. They often only look to see if you have a job and a regular paycheck. However, if someone does that, the new debt will not be covered by their proposal, and they will be required to pay that debt back in full," says Kroll. 

There is also a legal dimension that many borrowers overlook. Kroll notes, "I have seen people take out payday loans during a consumer proposal, but it may not come to our attention unless there is an opposition to their discharge. If we do find out, there are consequences; while in a bankruptcy or proposal, there is a prohibition against borrowing more than $1,000 without first disclosing to the lender that you are currently in that process." Failing to disclose your consumer proposal status when borrowing more than $1,000 violates the rules under the Bankruptcy and Insolvency Act. 

Why Payday Loans During a Consumer Proposal Make Your Situation Worse

The entire point of a consumer proposal is to reduce your debt load and give you a manageable path to becoming debt-free. A payday loan works directly against that goal. Payday loans are extremely expensive compared to virtually every other form of borrowing. In Ontario, for example, lenders can charge up to $14 per $100 borrowed for a two-week term, which translates to an annual rate of roughly 364%.

If you are already on a tight budget making your proposal payments, adding a payday loan repayment creates a real risk of falling behind. Missing three monthly payments on your consumer proposal can result in the proposal being deemed annulled, which means your creditors regain the right to pursue you for the full original debt amounts. 

New payday loan debt also creates a cycle that is extremely difficult to break. Many borrowers who take one payday loan end up rolling it over or taking out additional loans to cover the first, which compounds the cost rapidly. This pattern is one of the most common reasons Canadians seek insolvency protection in the first place.

What to Do Instead If You Need Money During a Proposal

If you are facing a genuine cash crunch during your consumer proposal, you have better options than a payday loan. The first step is to contact your Licensed Insolvency Trustee. They can sometimes adjust your payment schedule or help you find community resources for emergency expenses. 

Rebuilding Credit After Your Proposal Is the Real Goal

The strongest financial move you can make during a consumer proposal is to focus on completing it successfully and rebuilding your credit profile from day one. You do not need to wait until the R7 rating falls off your report to start. 

One thing you can immediately do is apply for a secured credit card. A secured credit card requires you to place a deposit that serves as your credit limit, so there is minimal risk to the lender and no risk of spiraling debt. The Secured Neo Mastercard, for instance, is available to Canadians looking to rebuild credit and reports to the major credit bureaus, which helps you establish a positive payment history while your proposal is active. Using a secured card responsibly and paying the balance in full each month builds your credit score without adding to your debt burden.