October 24, 2024
Cars are expensive, and it’s not hard to find yourself in debt because of your car loan. Here’s what to do if you are struggling with debt.
After housing, transportation is the second largest household expenditure in Canada. Having access to a vehicle is often a necessary part of life, but its hefty price tag means that many take on car loan debt to satisfy their transportation needs. Not keeping up with car payments can result in the vehicle being repossessed, so it’s a top priority.
Mike Braga, a Licensed Insolvency Trustee with BDO Canada, estimates that over half of the people who seek his advice for debt relief have auto loan debt. It’s one of the major financial stressors facing Canadians. Are there solutions available when your debt becomes too much to handle? We spoke to Mike, and he shared his insightful tips
“Oftentimes, car loan debt follows people for years. Habits like buying new, opting for longer-term loans and rolling old car loans into new ones create a spiral that can put unwanted pressure on the household budget, leaving little or no money left for emergencies.”
— Mike Braga, BDO Licensed Insolvency Trustee
The average price of a new car in Canada in the second quarter of 2024 was $66,807, according to AutoTrader’s price index report. Even the cheapest new car the report looked at, the Honda Civic, costs an average of $37,567 in Canada. That’s not an amount most people can put down all at once on a car, meaning most Canadians buying cars now are taking on some level of car debt.
The high cost of cars means that many are falling behind on their loans. Equifax’s second quarter Consumer Trends report from August of 2024 stated that, “auto loan delinquency rates for non-bank auto lenders reached a historic high, while bank loan delinquencies were at the highest levels since 2019.”
If you’re faced with car loan debt that is no longer manageable, it’s important to know your options. Whether you decide to keep your vehicle or walk away from it, meeting with a debt professional can help you make the best decision for your own personal situation.
“If you think you will have trouble making a payment on your car loan,” says Braga, “call your lender ahead of time and try to make a better payment arrangement. Remember that your lender would always rather work with you than have to resort to legal action. Proactive communication is key.” The sooner you reach out to your lender the better. Missing multiple car loan payments could result in an involuntary repossession of your vehicle.
Refinancing your car loan debt can provide some relief, but it’s often unadvisable. For instance, if your credit score has improved, or if interest rates have gone down, and your payment period can remain the same, refinancing can help lower your monthly payments.
However, refinancing typically extends the length of your loan and will cost you more in the long run. “Remember that car loan debt often exceeds the value of your car” says Braga. “The danger of refinancing is having an upside-down car loan or carrying negative equity, where the vehicle’s value depreciates a lot faster than you’re able to pay off the debt.”
In other words, refinancing can lead to increased interest charges rate and longer loan periods that can outlive the life of your vehicle.
If your car loan debt is too much to handle, other expenses are likely to contribute to the pain. How are you handling your credit card bills, line of credit repayment and any other unsecured debts?
“Getting the right debt relief option can free up cash flow so you can stay on track with your mortgage and car loan,” says Braga.
It’s a common misconception that debt relief options like a consumer proposal or bankruptcy result in the loss of assets. This is untrue, as a consumer proposal allows you to keep all of your assets.
“A consumer proposal won’t include your secured loans, like your mortgage or car loan that you intend to keep; however, it will lower your unsecured debts and put you in a better position to meet these important financial commitments.”
There are also many provincial exemptions for what can be seized during bankruptcy.
More often than not, you are able to keep your vehicle and your home. A Licensed Insolvency Trustee can help you understand how the Bankruptcy and Insolvency Act applies to your personal situation.
Overspending on vehicles is an area of vulnerability for many Canadians. “Longer-term car loans that spread payments out over seven or eight years can be very tempting and push you into buying more car than you really need,” says Braga. “But this type of borrowing is like taking on a mini mortgage for a rapidly depreciating asset.”
When budgeting for transportation costs, needs really should outweigh wants. And as you consider your financing options, remember to also take into consideration any additional debt obligations, like credit card debt and student loans.
While it is more complicated to sell a vehicle you still owe money on it, it’s still an option. “The first thing you need to do is find out the payout amount from your financial institution. This might not be the same as the balance left on your loan,” says Braga.
“In order to sell the vehicle, you will need to pay off the loan first.” Another option is to trade in the financed vehicle to an auto dealer. However, if your car is worth less than the payout, this amount will be added to your new car loan. A Licensed Insolvency Trustee can go over the numbers with you and advise you accordingly.
If you can no longer make payments, you can return the vehicle to your lender. This is called voluntary repossession or voluntary surrender. In many cases, when the lender sells the vehicle, the amount it sells for won’t cover the amount you still owe. You will then be responsible for paying the difference.
For example, if you owe $10,000 on your car loan and the lender sells the car for $7,000, you will be responsible for paying the remaining $3,000. Your debt load will be significantly reduced this way.
Returning your car in this manner will not help your credit rating. If you have already missed several payments, your credit rating may already have suffered, but adding a voluntary repossession to your credit file will make it that much harder to qualify for an auto loan in the future.
Debt relief solutions like consumer proposals or bankruptcy only free you from unsecured debt, like credit cards and lines of credit. “A shortfall or an unsecured deficiency from the sale of a financed car can be included in a consumer proposal or a bankruptcy,” says Braga. “But it’s important to ensure that you surrender the vehicle before entering into a debt-relief program.”
If you’re struggling to afford your car these days, you’re not alone. A report from the Bank of Canada in 2023 found that delinquency rates for motor vehicle loans had surpassed pre-pandemic levels. Along with all the other expenses that car ownership entails, auto loan debt can definitely take a toll. If faced with a financial emergency, it can be hard to keep up. If you need help understanding your debt relief options, book a free initial consultation with a Licensed Insolvency Trustee.
As mentioned earlier, cars can easily become money pits. Between maintenance costs, insurance, gas, and car loan payments, it's no wonder why many people find themselves in debt due to their vehicles. The financial strain can quickly become overwhelming.
A BDO Licensed Insolvency Trustee, such as Mike Braga, can provide expert guidance on all available debt relief options, helping you make an informed decision that's best suited to your unique situation. The initial consultation is free of charge and 100% confidential, ensuring you receive the support you need without any additional financial burden.
Don't hesitate to reach out and explore the solutions that can provide you with a fresh start.
October 24, 2024
Cars are expensive, and it’s not hard to find yourself in debt because of your car loan. Here’s what to do if you are struggling with debt.
