Debt Relief Experts
If you can’t afford or have fallen behind on your car loan payments, there are options to deal with the debt. While a car loan can’t be directly included in a consumer proposal because it’s secured debt, there are ways to get relief through the consumer proposal process. Let’s look at your options for getting rid of an unaffordable car loan debt.
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How Are Car Loans Treated in a Consumer Proposal?
To understand how your car loan is handled in a consumer proposal, you first need to know the difference between secured and unsecured debt.
A secured debt means the lender has rights to a specific asset – in this case, your car. If you stop making payments, they can legally take back (or repossess) the vehicle. Credit cards and personal lines of credit, on the other hand, are unsecured debts because they aren’t tied to any specific asset.
Your car loan is a secured debt. Secured debts are not included in a consumer proposal. If you want to keep your financed vehicle, you must continue making your regular car loan payments even after filing a consumer proposal.
One benefit of filing a consumer proposal is that it can actually help you keep your car. By reducing your other debt payments through a proposal, you may find your car loan becomes more affordable. For example, if you’re currently paying $800 per month on credit cards and other unsecured debts, a consumer proposal might reduce this to $300 per month. This $500 difference in monthly payments could make it easier to maintain your car loan payments and keep your vehicle. The key is looking at your entire financial picture, not just your car loan in isolation.
Getting Out of A Car Loan with a Consumer Proposal
But what happens if your car payment is too high for your budget? If this is your situation, there are still options to include your car loan debt in a consumer proposal.
You can choose to do what’s called a voluntary surrender of your vehicle. This means you work with your lender to return the car. While this might sound scary, it’s better than waiting for the lender to repossess the vehicle. A voluntary surrender puts you in charge of when and where the vehicle is picked up. It can also help you avoid the additional stress of collection calls and unexpected repossession.
When you surrender your car, any remaining balance you owe can be included in your consumer proposal. Here’s how it works:
- You return the car to the lender before filing your proposal
- They sell it at auction
- If there’s still money owing after the sale, this shortfall becomes an unsecured debt
- This unsecured debt can then be included in your consumer proposal
For example, if you owe $12,000 on your car and it sells for $8,000, the remaining $4,000 becomes an unsecured debt that can be included in your proposal. Keep in mind that repossession costs and any late payment fees will be added to your balance, but these additional charges can also be included in your proposal.
What If I Owe More Than My Car Is Worth?
Many people owe more on their car than it’s worth – this is called negative equity. You’re not alone if you’re in this situation. Almost 20% of people filing insolvency are underwater on their car loan, owing an average of $9,400 more than their car is worth.
There are several reasons why you might end up owing more than your car is worth. Today’s car loans often stretch out over 6 to 8 years, which means your car’s value drops faster than you can pay off the loan. High interest rates, especially if you have credit challenges, make this problem worse because more of your payment goes to interest rather than reducing what you owe. Sometimes, people roll an old auto loan into a new one when trading in their vehicle, which starts them off owing more than the new car’s value from day one.
If you have negative equity, you can return the vehicle to the lender and include any shortfall amount in your consumer proposal.
Can I Buy a New Car After Filing a Consumer Proposal?
If you need to replace your car after filing a consumer proposal, you can still get a car loan. While your options may be more limited at first, there are lenders who specialize in working with people in a consumer proposal. You’ll likely face higher interest rates initially, but these rates can improve over time as you rebuild your credit.
The key is working with reputable lenders and making sure any new car loan fits comfortably within your budget. Remember, the goal is to complete your proposal successfully and build a stronger financial future.
Talk to a Licensed Insolvency Trustee About Your Options
Before deciding on what to do about your car loan, consider:
- Do you need your car for work or family reasons?
- Would a less expensive car meet your needs?
- Can you sell the car and transfer the loan to someone else? Your car loan lender will have to agree.
- Can you negotiate with your lender for more affordable payments?
- Can you afford the monthly payments and still make your proposal payments?
- What other transportation options are available in your area?
- How much negative equity do you have?
A Licensed Insolvency Trustee can review your entire financial situation and help you understand all your options. Our team at Hoyes Michalos can explain how different choices about your car loan might affect your consumer proposal and help you make the best decision for your situation. Contact us today for a free consultation to discuss your car loan and other debt relief options.
