Debt Relief Experts
If you’re struggling to make your car payments, you’re not alone. Many Canadians find themselves in this situation through no fault of their own – job loss, illness, or unexpected expenses can all make it difficult to keep up with car payments. The good news is that you have options, and help is available.
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Quick Action Plan
The first step is to look at your specific financial situation and take action accordingly:
- Try not to miss any payments if you want to keep your car. A missed payment can damage your credit score and change how your lender views your situation. Review your budget to determine if this is a temporary issue or if you can’t afford your car payments long-term.
- If your car loan is in collections, understand how secured debt works. Know that collection agents must follow specific rules. Keep records of all calls and amounts owing. Consider whether debt relief options like a consumer proposal could help resolve both your car loan and other debts.
- If you’ve already missed payments and are considering walking away from your car loan, talk to a Licensed Insolvency Trustee first. They can explain options like a voluntary surrender.
- If you’re facing repossession, contact your lender immediately to discuss payment arrangements. Many lenders offer temporary payment deferrals or modified payment plans for short-term hardships. Document all communications, and don’t ignore legal notices.
- If your car has already been repossessed, again, talk with a Licensed Insolvency Trustee about how to eliminate a shortfall on your car loan.
Signs You’re Struggling with Car Loan Debt
You might be heading for trouble with your car loan if you:
- Use credit cards to make car payments
- Regularly make late payments
- Have no emergency savings for car repairs
- Skip other bills to make car payments
- Feel anxious every time a car payment is due
- Can barely afford gas and insurance on top of payments
What Happens When You Miss Car Payments
A car loan is a secured debt, which means your vehicle serves as collateral for the loan. Your car lender can repossess your vehicle without going to court if you default on payments.
After your first missed payment, your lender will contact you within a few days. While this usually starts as a reminder, collection actions quickly escalate if payments remain missed.
At 30 days late, your missed payment is reported to the credit bureaus, damaging your credit score. Your lender will also start charging late fees and additional interest, making it harder to catch up.
By 60 days late, your loan is considered in default. You’ll receive formal written notices about potential repossession. Collection calls will become more frequent.
After 90 days of missed payments, most lenders will initiate repossession proceedings.
Keep in mind that while you cannot go to jail for not paying a car loan, lenders have several other legal options to collect their debt:
- Sue you for the outstanding balance
- Garnish your wages if they win a court judgment
- Repossess and sell your vehicle to cover the debt
If your car is repossessed, the lender will sell it at auction. You’ll still be responsible for any remaining loan balance after the sale (called a deficiency balance). In Ontario, creditors generally have two years from your last payment to take legal action for this remaining debt.
Your Options for Dealing with Car Loan Debt
Working with Your Lender
If you’re struggling with payments, your first step should be contacting your lender. Many lenders would rather work out a payment plan than go through the expense of a car repossession. They might offer temporary payment reductions, deferred payments, extended loan terms to lower monthly payments, lower interest rates or suggest other loan modification programs.
While these options can provide short-term relief, be careful about extending your loan term too much. You might end up paying significantly more in interest over time.
Emergency Payment Options to Avoid
If you have emergency savings, using them might help you avoid defaulting on your loan. While this leaves you temporarily vulnerable, it can prevent more serious consequences. However, some common emergency solutions can actually make your situation worse.
Using credit cards for car payments is rarely a good idea. You’ll typically pay much higher interest rates, and if you can’t pay the credit card, you’ll have two debts to deal with instead of one. Similarly, we do not recommend taking out a payday loan to make your car payment. This will leave our short next payday.
Transferring the Loan
You might be able to transfer your car loan to another person, but this option comes with significant considerations. The new borrower must be approved by your lender and meet their credit requirements. Even if approved, you may still be responsible if they default on the loan. Not all lenders allow loan transfers, and the process can be complex and may come with extra fees.
Selling or Trading Down
If you have equity in your vehicle, selling it or trading it in at a dealership might be your best option. You can use the proceeds to pay off the loan and potentially purchase a less expensive new or used vehicle that better fits your budget. While being without a vehicle temporarily might be challenging, it’s often better than struggling with payments you can’t afford or risking repossession.
Refinancing and Debt Consolidation
Refinancing your auto loan or consolidating it with other debts might lower your monthly payments. When you refinance, you replace your existing loan with a new loan at a lower interest rate or longer repayment term.
For debt consolidation, you have several options:
- Personal loans from banks or credit unions
- Line of credit
- Debt consolidation loans
- Home equity loans (if you’re a homeowner)
However, you need good credit to qualify for debt consolidation and must be able to afford the monthly payments. Your new loan provider may also require you to use your vehicle as collateral.
Car title loans are a risky option. These loans use your car’s equity as collateral and often charge extremely high interest rates. They can create a dangerous debt cycle and put you at risk of losing your vehicle if you default.
Voluntary Surrender
Voluntary repossession allows you to work with your lender to return your vehicle in a planned, coordinated way rather than facing unexpected car repossession. This option lets you take control of the timing and arrange alternative transportation while maintaining a more cooperative relationship with your lender. You can avoid repossession fees and plan your next steps proactively. While this option still affects your credit rating, the structured approach can help you better manage the transition.
However, it’s important to understand that you’ll still be responsible for any remaining loan balance after the vehicle is sold.
Filing a Consumer Proposal or Bankruptcy
While a car loan is typically secured debt that cannot be included in a bankruptcy or consumer proposal, you have two options to eliminate car loan debt through insolvency:
- Eliminating your other debts, like credit card debt and payday loans, through bankruptcy or a consumer proposal can free up enough monthly cash flow to comfortably maintain your car loan payments, allowing you to keep your vehicle.
- Returning the vehicle to the lender and including any remaining loan balance in your bankruptcy or consumer proposal can eliminate car loan debt. This is a good option if your car loan is too expensive or your car is worth less than your loan.
Making the Right Choice for Your Situation
When deciding how to handle your car loan debt, consider:
- How much you still owe compared to the car’s value
- Whether you can realistically afford the payments long-term
- If you absolutely need this particular vehicle
- Your overall debt situation
- Your income stability
- Your other transportation options
Getting professional advice can help you understand all your options and make the best decision for your situation. As Licensed Insolvency Trustees, we can help you understand how to deal with your car loan debt while protecting your rights and working toward a better financial future.
