Can’t afford car payments – what are my options?

Posted on 11 November 2021

Written by Colin Boulton

Just behind buying a home, buying a car is for the vast majority of us one of the major purchases we make in our lives. And with cars increasingly becoming more high tech with newer and slicker features, it is little surprise that they are also becoming more and more expensive. Greater expense means the days when you could hand over cash in exchange for a vehicle are almost behind us. Nowadays, it is all about car loans or leases and repayments that are made over a number of years. With car loans comes increased rates of car loan debt. So what happens when you can’t afford car payments, and what are your options? How do you avoid car repossession? In this article, we will discuss the consequences if you can’t afford car payments, and we will advise you on what to do next.

How can car loans lead to debt problems?

With new, more exciting car models being released each year and increasing societal pressure, it is little wonder that more and more cars are being purchased in Canada. Not only that, but they are being purchased more often with debt through substantial car loans. According to CBC, over half of all new car loans are currently financed for seven years or longer. Long-term financing means it can take many Canadians seven years or more to repay a depreciating asset. This may be manageable as a one-off purchase, but many people want to trade in their vehicle every couple of years for a newer model. Longer loans can increase the chance of you ending up owing more than your car is worth. This in turn can cause debt to roll over, even before all the other charges like taxes, insurance, gas, and even repairs and maintenance if the vehicle is second hand. It is little surprise, therefore, that there are increasing debt problems associated with car loans across Canada. If this is you, you are not alone, and there is a debt relief solution for you.

How can you avoid car loan debt?

If you do not want to be in a situation where you can’t afford car payments, the most important thing is to consider the total value of the car in cash terms. This should be your way of thinking instead of a short term mentality, like simply how much you would need to repay each month. This short term thinking is what can eventually spiral into longer term debt. Instead, you should consider how much you can actually afford to put towards a vehicle in realistic terms. This should factor in all your other expenses too. Before you head off to purchase a car, be sure to spend some time calculating an affordable amount, create a budget, and figure out exactly what you can afford with a view to the long term. It is also important to keep your loan payment as short as possible where you can. If you cannot pay cash, the next best thing to do is put down as much of a down payment as you possibly can to shorten the terms of your car loan. This should help to make your car loan much more manageable, and less likely to lead to overwhelming debt.

I can’t afford car payments – what are my options?

If you have realized you can’t afford car payments, the most important thing to do is to speak to a Licensed Insolvency Trustee immediately. As the only professionals legally able to administer all forms of debt relief in Canada, they will offer the most authoritative advice for your circumstances. At Spergel, we will review your financial circumstances and educate you to make an informed decision that is best for you. When it comes to car debt relief options, there are several pathways that are taken most often:

Consumer proposal for car debt

Consumer proposals are a form of debt relief whereby any unsecured debt you have is reduced by up to 80% by agreeing a manageable monthly payment you can afford with your creditors. In turn, they will clear any remaining debt you have and allow you to keep your assets. Car loans are considered to be secured debts by contrast, but consumer proposals are ideal should you have other debts like credit card debt or payday loans that are preventing you from making repayments towards your car loan. Provided you can make your car loan payments, you can keep your car.

Bankruptcy for car debt

Similarly to consumer proposals, bankruptcy will only clear unsecured debt – so not car loans. Bankruptcy, however, is a great option if you are struggling with overwhelming debt which means you are defaulting on car loan repayments. As bankruptcy will cover even tax debt, it can clear any unsecured debt you have and allow you to start a fresh financial future. Once again, provided you can keep up your car loan payments, you can keep your car. Bankruptcy is ideal particularly if you have a shortfall from rolling over one car loan to another, as you can add this to your pool of unsecured debts to clear.

Refinance your car loan

If you had poor credit when purchasing your vehicle, it is likely you are paying high interest rates on your car loan. This will make your payments expensive, and they may become unmanageable. If, however, your credit score has improved over a substantial amount of time since you took out your car loan, it may be possible for you to get a new car loan with a more favourable interest rate. Check your credit score using either TransUnion or Equifax, or simply speak to one of Spergel’s Licensed Insolvency Trustees for advice on your best option. If your credit score has improved, you could potentially refinance your loan.

Sell your car

Nobody wants to sell their car unless they have to, and if you are unable to afford your monthly car loan payment, in some cases this is best. If you are able to sell your vehicle for roughly the same amount you paid for it, you will likely be able to pay off the majority of your car loan. Instead, you can find a cheaper car which will have a much more manageable monthly car loan payment that you can afford. This is much more favourable than having the bank repossess your car and impacting your credit score. If in doubt, speak to a Licensed Insolvency Trustee who understands the rules and can explain your options to you.

When does a car get repossessed?

Repossession happens for financed or leased cars when the dealership maintains ownership of the vehicle until it is repaid in full. This is part of the contract you sign at the beginning of the agreement. If you bought your vehicle, it is yours, but the dealership can register a lien on your vehicle as a way of ensuring payment. If you miss payments, they can repossess the vehicle. Legally, they must notify you that you are behind on your payments, but they do not need to let you know when they plan to send someone to take your car. If you take action, this becomes an involuntary repossession. If you know that you cannot afford your car loan, you can surrender your vehicle, also known as voluntary surrender.

What happens when your car is repossessed?

Something many lenders do not realize about their car loan is that having your vehicle repossessed does not suddenly mean that you no longer have to make car loan payments. You still have an obligation, based on the agreement you signed initially. What will happen, however, is once the vehicle has been seized, it can be put up for auction or sold. Any proceeds made will be taken away from the remaining car debt that you owe. Do bear in mind that additional charges including repossession costs, interest, and late payment fees will be added. This then becomes an unsecured debt, meaning that while you still owe your lender, you have much more freedom when it comes to your debt relief options. This will have an impact on your credit score, but here at Spergel, our experienced Licensed Insolvency Trustees will help you to rebuild your credit score. The only way to avoid repossession is to make the appropriate payments on your car loan that were agreed in the initial terms of your contract.

If you are concerned that you can’t afford car payments, book a free consultation with the Licensed Insolvency Trustees at Spergel. We have over thirty years of experience helping Canadians with car loan debt and gaining them debt relief. You will be assigned your own bankruptcy trustee who will review your financial circumstances and offer you advice on the best pathway to financial freedom.

Colin Boulton

Colin Boulton

Colin Boulton is a Chartered Accountant and Insolvency and Restructuring Professional with over 20 years’ experience as an LIT (Licensed Insolvency Trustee). He is also our resident expert on unemployment and wage garnishments and manages Spergel's offices in Eastern Ontario (including Oshawa, Peterborough, Lindsay, Ajax and Scarborough). When not at the office helping clients cross their debt-free finish lines, Colin enjoys training for and participating in triathlons.

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