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.
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. As people continue to spend more on vehicles and lengthen their loan terms to seven or eight years, Braga wonders if consumers are making decisions they will later regret.
“Oftentimes car loan debt can follow 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
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 car loan debt is too much to handle, other expenses are likely contributing 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 can free up cash flow so you can stay on track with your mortgage and car loan,” says Braga. “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.”
It’s a common misconception that debt relief options like a consumer proposal or a bankruptcy result in the loss of assets. 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 own 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 financial institution. This is called voluntary repossession or voluntary surrender. In many cases, when the lender sells the vehicle, the proceeds won’t cover the amount still owing. In most provinces, you will still be responsible for the shortfall balance of your loan.
Returning your car in this manner will not help your credit rating. If you have already missed a number of 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.”
According to the 2021 BDO Affordability Index, 38 per cent of indebted Canadians have auto loan debt. 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.
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