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Defaulting on a Car Loan in Canada

Defaulting on a Car Loan in Canada

Defaulting on a car loan means you have failed to make your scheduled loan payments to the lender as agreed upon in the loan contract. There is no single standard for when a loan goes into default, as it depends on state laws and individual lender policies. However, in most cases an account becomes delinquent after the first missed payment, and then goes into default after 30-90+ days of no payments being made.

Once in default, you have essentially broken the terms of your loan agreement. The lender has provided you the financing to purchase the vehicle with the expectation you will repay the loan on time each month. When you stop making payments for an extended period, you are no longer holding up your end of the legal contract.

Being in default gives the lender certain rights, like repossessing the vehicle and reporting the default to credit bureaus. Defaulting can also result in late fees, penalties, increased interest rates and other consequences outlined in the loan agreement. So it’s important to understand that not making payments has real and serious effects.


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Common Reasons People Default

Defaulting on a car loan can happen to anyone. Even responsible borrowers can run into circumstances that make their auto loan unaffordable. According to data from credit agencies, the most common reasons for defaulting are:

Loss of Income

Losing your job or having your hours reduced can quickly make a car payment unmanageable. Income loss is one of the biggest triggers for missing payments and eventually defaulting on an auto loan. If you lose your income source, it becomes very difficult to keep up with monthly expenses, especially a large one like a car payment.


High Interest Rates

Higher interest rates mean higher monthly payments. If you have a credit score in the subprime range, you may only qualify for a loan with a high interest rate of 18% or more. This can equate to hundreds of dollars in additional interest charges each month compared to a loan with average rates. The higher payment makes the loan harder to afford long-term.


Loan Amount Too High

Borrowing more than you can reasonably afford is another path to default. Some buyers stretch their budget too thin to get a more expensive vehicle. If the loan amount is too large relative to your income, it sets you up for trouble making payments down the road, especially if any other expenses come up.


Increased Living Expenses

Even if a loan payment was affordable initially, changing life circumstances can alter that. Events like having a baby, costs from medical issues, or major home repairs can strain your budget. Taking on additional expenses makes it harder to dedicate money to your car payment each month, increasing late and missed payments.


Consequences of Defaulting

Defaulting on your car loan can lead to severe financial consequences that make recovering difficult. Some of the main impacts include:


Late Fees and Penalties

After missing just one payment, your lender will start tacking on late fees, often $25-50 for the first missed payment. If you go 60 days without paying, the late fees rack up quickly. Your lender will also likely raise your interest rate significantly as a penalty for defaulting. This results in you owing much more interest over the life of the loan.


Vehicle Repossession

If you stop making payments, the lender can legally take back the car through repossession. In most states, this can happen after 90 days of no payments. The lender hires a repossession company to pick up the vehicle, sometimes without warning. Voluntary repossession when you return the car avoids a forced process.


Damage to Credit Score

Defaulting and having your car repossessed causes severe harm to your credit score. It can drop 100 points or more. These derogatory marks stay on your credit report for 7 years. With a lowered score, you’ll have difficulty getting approved for financing or loans.


Potential Collections

After default, the lender may send the remaining loan balance to a collections agency. This again damages your credit. The collections agency will aggressively pursue you for repayment through calls and letters. Collection accounts also stay on your credit history for 7 years.


Owe More Than Car’s Worth

With a repossession, you are still responsible for paying the deficiency balance, which is the difference between what the car sells for at auction and what you still owed. Because of depreciation and fees, you often owe thousands more than the car’s resale value, leaving you further in debt.


What to Do Before You Default

Defaulting on your auto loan can severely damage your credit and finances for years to come. Before choosing to stop making payments, it’s important to fully understand your options and the consequences. The best course of action is to be proactive and take steps to avoid default if possible.

First and foremost, communicate honestly with your lender as soon as you anticipate difficulties making payments. Lenders want to help borrowers stay current on their loans. Let them know if your financial situation has changed due to job loss, medical bills, or other hardships. Many lenders will work with you to adjust payment dates, offer temporary reductions, or modify the loan terms.

Refinancing your auto loan while you’re still current is another option to potentially lower the monthly payment to a more affordable amount. You may be able to extend the repayment period or secure a lower interest rate. Compare offers from multiple lenders to find the best terms.

Voluntarily surrendering the vehicle back to the lender is preferable to forced repossession down the road after defaulting. You may still owe any difference between what the car sells for at auction and what you still owe, but it protects your credit from further damage.

Selling the vehicle yourself and paying off the loan with the proceeds is ideal if possible. This allows you to maximize the sale price. But move quickly, as the value drops rapidly after you stop making payments and interest continues accruing.

The key is facing your situation head-on and exploring every alternative before choosing to default. Don’t let fear or shame prevent you from being proactive. Your lender wants to help you avoid default just as much as you do.


Getting Out of Default

Once you default on your auto loan, it can feel like an impossible situation. But there are still options to recover and move forward. With some effort, you may be able to avoid a repossession and the lasting damage to your credit.


Payment Plan with Lender

Your first step should always be to contact your lender directly. Explain your financial hardship and ask about alternative payment arrangements. Many lenders would prefer to work with borrowers rather than repossess vehicles. They may allow you to defer payments for a few months, lower your monthly payment temporarily, or extend the loan term to make payments more affordable. This requires open and honest communication on your part.


Voluntary Repossession

Voluntary repossession involves voluntarily surrendering your vehicle to the lender. This shows you’re acting in good faith. It can sometimes stop a forced repossession that is more damaging to your credit. Before surrendering the vehicle, review the loan contract. Some stipulate you’ll still owe a deficiency balance – the difference between the car’s value and what you still owe on the loan.


Sell Car Privately

Selling the car yourself and using the proceeds to pay down the loan is an alternative option. You’ll need to sell it for enough to cover the loan balance. Pay off the lender immediately after the sale to stop the default status. You may owe taxes and fees on the transaction but can avoid a repossession.


Refinance After Repairing Credit

A last resort is to eventually refinance your auto loan once you’ve repaired your credit. This involves paying down balances, disputing errors on your credit reports, and demonstrating on-time payments with secured credit cards. After 1-2 years of credit repair, you may qualify for refinancing, likely at a higher interest rate. The goal is making the monthly payments affordable long-term.


Rebuilding Credit After Default

Once your car loan is in default, it can feel like you’ll never be able to qualify for credit again. But there are steps you can take to start rebuilding your credit and recover over time.

First, make sure all your other accounts are current. If you have credit cards, personal loans, or other car loans, keeping up with those payments consistently will begin to offset the negative impact of the default. Paying other accounts on time shows lenders you still have the ability and willingness to meet your obligations.

Next, pull your credit reports and dispute any errors you find that may be dragging down your score. Common mistakes include wrong account balances, accounts that aren’t yours, and incorrect late payment notations. Getting errors removed can give your score an immediate boost.

In the months and years after a default, establishing a solid track record of on-time payments will demonstrate you’ve changed your financial habits for the better. Use secured credit cards or “credit builder” loans specifically designed to help improve payment history.

Finally, once you’ve paid the defaulted car loan balance down significantly or in full, consider asking the lender for goodwill removal. Write a goodwill letter politely asking them to take the default off your credit report, explaining how the situation was out of your control and that you’ve learned from the experience.

With dedication and financial discipline, you can begin to recover and qualify for reasonable loan rates again over time. The most important thing is facing the situation head-on and doing everything possible to get back on the right track.


Impact on Future Auto Loans

Defaulting on your existing auto loan can severely limit your ability to qualify for a new car loan in the future. Here are some of the key ways it can impact you when trying to get approved for future auto financing:


Harder to Qualify for New Auto Loan

Having a default on your credit history makes lenders see you as a high-risk borrower. They know you’ve already failed to repay a major loan in the past. This results in most mainstream lenders automatically declining any application you submit for a new car loan.


Higher Interest Rates

If you manage to get approved, it will likely come with a sky-high interest rate. Lenders will charge you a much higher rate to try and offset the risk you pose of potentially defaulting again. Interest rates could be over 20% APR versus a normal range of 4-8% for borrowers with good credit.


Larger Down Payment Required

Since you’re viewed as risky, a lender will require a larger down payment upfront if you want to qualify for financing. While most lenders accept little or no down payment from borrowers with clean histories, you may need to put 20-30% down or more after a default.


Shorter Loan Terms

Any loan you qualify for will likely have a shorter overall term length, often 24 months instead of the normal 36-72 month terms. This keeps the lender’s risk lower on the loan. It also results in a higher monthly payment for you since you’re repaying the principal faster.

In summary, expect much more stringent requirements and less favourable rates if trying to get a car loan after defaulting in the past. It pays to avoid default if at all possible to prevent hampering your future auto financing options.


Alternatives to Defaulting

Defaulting on your auto loan can severely damage your credit and finances for years to come. However, you may have alternatives to default that allow you to avoid some of the harshest consequences.


Loan Modification

Contact your lender to discuss loan modification options like lowering the interest rate or extending the repayment term. This can reduce your monthly payments to a more affordable amount. Your lender wants to avoid default, so they may work with you if you communicate early and honestly about your situation.


Defer Payments

Ask your lender if you can defer 1-2 payments to the end of the loan term. This gives you temporary relief without being considered delinquent. Deferment allows you to catch up and avoid default.


Refinance the Loan

Consider refinancing your auto loan through your bank or credit union. You may qualify for a lower interest rate, which reduces your payments. Refinancing resets the loan terms and brings your account current.


Trade In the Car

Trading in your current vehicle for a less expensive model can lower your payment to a more manageable amount. Any positive equity from your trade-in goes toward the new loan balance. Just beware of rolling over too much negative equity.


Voluntary Repossession

With voluntary repossession, you return the vehicle to the lender rather than having it forcibly repossessed later. This avoids some fees and shows responsibility. However, it still damages your credit, so consider all options first.


Communicating with Your Lender

If you find yourself struggling to make payments, it’s important to reach out to your lender right away. The earlier you communicate the difficulties you’re facing, the more options they will have to work with you.

When you call, clearly explain your financial situation and reasons you are unable to make the monthly payments. Provide details on loss of job, medical bills, or other circumstances causing the hardship. Ask what programs or solutions may be available to help you get back on track.

Most lenders have hardship options to avoid default, such as temporarily reducing or suspending payments, extending the loan term to lower payments, or deferring payments to the end of the loan. Make sure to get any proposed agreements in writing before moving forward.

Being open and honest gives the best chance of finding an alternative solution. Ignoring the issue and avoiding your lender’s calls will only make the situation worse in the long run. Partner with them on a plan to successfully get your payments back on schedule.


Selling the Car

One of the best ways to get out of default is to sell your car. This allows you to pay off the loan balance (or a portion of it) while also removing the monthly payment obligation. There are a few options for selling a car when you still have an outstanding loan:


Private Sale

You can sell the car directly to an individual buyer for the highest possible amount. This gives you leverage to negotiate a price that covers your remaining loan balance. List the car online or put up ‘for sale’ signs to find motivated buyers. Be upfront about the lien on the title – the buyer will need to get financing or pay the lender directly.


Trade-In at Dealership

Trading in your car is simpler than a private sale. The dealer handles paying off your old loan and applying the trade value to your new purchase. But trade-in values are typically lower, since the dealer needs to make a profit reselling your car. Get quotes from multiple dealers to maximize your trade-in amount.


Consignment at Used Car Lot

With consignment, a used car dealer sells the car for you and takes a commission. This nets more money than trading in, but less than a private sale. The used car lot handles the sales process including advertising, paperwork and loan payoff. Make sure to vet the dealer’s reputation if going the consignment route.

Selling the car takes more effort than voluntary repossession but allows you to tap into the car’s value. This path can help you avoid a big deficiency balance and minimize damage to your credit from default.


Voluntary Repossession

Voluntary repossession, also known as voluntary surrender, can be an option if you can no longer afford your car loan payments and want to avoid a forced repossession by the lender. With voluntary repossession, you voluntarily return the financed vehicle to the lender.

There are some potential benefits to voluntary repossession compared to forced repossession:


  • Avoids additional fees – Once your loan is in default, the lender can charge repossession fees and other costs related to coming to take the vehicle. If you voluntarily surrender it, you avoid these forced repossession fees.
  • Stops accruing late fees and penalties – When you are not making payments, late fees and default interest rates continue to accrue, making the balance even harder to repay. Voluntary repossession puts an end to these accumulating costs.
  • Lender may waive deficiency balance – In some cases, the lender may agree to waive the remaining deficiency balance you owe after repossession if you voluntarily cooperate.


However, there are also downsides to be aware of with voluntary repossession:


  • Credit damage – The voluntary repossession will still appear on your credit report and hurt your credit score.
  • Still owe deficiency – You will likely still owe the deficiency balance between what you owed and what the lender can sell the car for.
  • Lose equity invested – Any down payment or monthly payments made will be lost.


Overall, voluntary repossession can be a better option than forced repossession since it stops additional costs from accumulating. But it’s still a last resort option that should only be considered if you have no other way to afford the loan payments or sell the vehicle.


Forced Repossession Process

If you are unable to work out an alternative solution with your lender, they can proceed with forcibly repossessing your vehicle after you default. This is usually the last resort after multiple failed attempts to contact you and provide options to get your loan current again.

Once your lender determines repossession is the only option left, they will hire a repossession agency to retrieve the vehicle on their behalf. This agency will come to your home or other location where the vehicle is parked and either knock on your door asking for the keys, or hook it up to a tow truck and haul it away unseen if you are not present.

There are fees associated with having your vehicle repossessed, including towing/storage fees and processing fees. These will be added to your overall deficiency balance. The repossession will also be reported to the credit bureaus, damaging your credit score.

Forced repossession is an unpleasant experience that can be avoided by working with your lender. But if you are unresponsive to their attempts to contact you and bring the loan current, repossession allows them to minimize losses by retrieving the vehicle and selling it to pay off your loan balance.


Deficiency Balance After Repossession

One of the biggest shocks when your vehicle gets repossessed is finding out you may still owe money to the lender. This is known as a deficiency balance.

When the lender sells your repossessed car at auction, it rarely sells for enough to cover the remaining loan balance. Auction prices are typically much lower than retail value or even wholesale value.

For example, if you owed $15,000 on your loan when the car was repossessed, but the lender only got $10,000 at auction, you would be on the hook for the $5,000 difference. This is the deficiency balance.

The lender has every right to pursue this balance in court if you don’t pay it. They may turn it over to collections or file a lawsuit to garnish your wages until it’s paid off.

Any amount forgiven after auction is also considered taxable income by the IRS. So if your $15,000 balance was reduced to $10,000 after auction, you may receive a 1099-C tax form reporting the $5,000 as income, even though you never saw that money.

This can lead to owing income tax on phantom income you never actually had. It’s just another consequence of defaulting that makes it so critical to avoid default if at all possible.


Bankruptcy to Eliminate Car Loan

Filing for bankruptcy is a last resort option to get out of a defaulted auto loan. Under Chapter 7 bankruptcy, your qualifying debts can be entirely wiped out or discharged. This includes credit card balances, medical bills, personal loans, and in many cases, auto loans.

To qualify for Chapter 7 bankruptcy and car loan discharge, you’ll need to pass the means test showing you lack enough income to repay debts. Your car may also need to be surrendered as part of the process if you still have possession of it.

The major benefits of eliminating an auto loan through Chapter 7 bankruptcy are:


  • The entire remaining balance can be discharged so you owe nothing more.
  • All collection calls and lawsuits from creditors are halted.
  • Wages can no longer be garnished over the debt.


The downsides are the severe damage to your credit score and history. A Chapter 7 bankruptcy can remain on your credit report for up to 10 years. This can make it very difficult to qualify for new loans or credit cards.

You may have to wait up to two years after the bankruptcy discharge to get approved for a car loan again. Interest rates will likely be higher due to the increased risk.

Before taking the bankruptcy route, be sure to fully explore all options with your lender first. Weigh the pros and cons and long term impacts on your financial situation.



Defaulting on your car loan can have severe financial consequences that impact your credit, assets, and future borrowing ability. While it may seem like an easy way out, it should only be a last resort after exploring every other option.

The best path forward is open communication with your lender at the first sign of trouble. They want to retain you as a customer, and may offer modified payment plans or refinancing options. Selling the car or voluntary surrender are also preferable to forced repossession.

If default does occur, focus on rebuilding your credit right away. Get current on other accounts, dispute errors, and show a good payment record over time. With diligent work, you can eventually recover and qualify for loans again.

Though default feels inevitable at times, staying in touch with your lender, assessing all alternatives, and protecting your credit score can help minimize the financial damage as you regain stable footing.

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Questions About Defaulting on a Car Loan

Defaulting on a car loan in Canada can have serious consequences. The lender will likely repossess your vehicle once you have missed several payments and are considered in default. This can damage your credit score for up to 7 years. You may also owe the difference between what your vehicle sells for at auction and what you still owe on the loan.

In Canada, defaulting on a car loan generally means you have missed at least 3 consecutive monthly payments. After 90 days with no payment, your auto loan will usually be considered in default. At this point, the lender can begin the repossession process to take back the financed vehicle.


Most auto lenders in Canada will start the repossession process within 90-120 days after a borrower defaults on their car loan. Legally, your vehicle can be repossessed as soon as you miss one payment in some provinces. But most lenders will give you a few months before beginning repossession.

You may be able to avoid repossession after defaulting if you immediately contact your lender and show you are willing and able to catch up on payments. They may set up a payment plan or loan modification. Voluntarily surrendering the car may also avoid repossession. But there is no guarantee the lender will not take back the vehicle once in default.

Defaulting on any loan in Canada including an auto loan can severely damage your credit. A default will be registered in your credit file and can stay on your report for up to 7 years. This can make it very difficult to qualify for other loans or credit during that time due to the negative impact on your credit score.

No, a default on an auto loan in Canada can’t simply be removed from your credit bureau history. It will stay on your credit file for up to 7 years. You may be able to improve your credit score faster by settling the debt collection and continuing to build positive credit history over time. But the actual default notation will remain as long as permitted by law.


Voluntary repossession when you can no longer afford payments may allow you to avoid some of the credit damage caused by forced repossession in Canada. With voluntary repossession, you return the vehicle to the lender before they have to send collection agents. This shows good faith effort to repay debt.

Voluntary repossession in Canada involves voluntarily surrendering your financed vehicle to the lender when you can no longer make the payments. You bring the vehicle to a predetermined location, hand over the keys and release ownership rights. This avoids having it forcibly repossessed.

To voluntarily repossess your car in Canada, contact your lender immediately if you can no longer make payments. Ask if you can voluntary surrender the vehicle instead of waiting for forced repossession. If approved, they will give you instructions on properly returning the vehicle to settle the loan.

The lender will sell your repossessed car at wholesale auction in Canada. You will receive a notice detailing how much the vehicle sold for. If it sold for less than your remaining loan balance, you will still owe the lender this deficiency balance plus fees like storage and collection costs.

Once your vehicle is repossessed in Canada whether voluntarily or forcibly, it cannot just be taken back. Even if you suddenly obtain money to catch up on payments, the repossession and default process cannot be reversed. The car will be sold at auction to settle the defaulted loan.

In most cases in Canada, you will not receive any money back after your car is repossessed by the auto loan lender. Proceeds from the vehicle auction sale go towards paying off your total loan balance. If any funds remain after paying the loan, fees, storage, etc., you would get these funds. But this is very rare.

It is usually not possible to buy back your repossessed car directly from the lender in Canada. The lending institution will send the vehicle to wholesale auto auction to sell it to a third party bidder. This process allows them to recover costs related to the defaulted auto loan.

In Canada, the statute of limitations for an auto lender to sue an individual for defaulting on a car loan ranges from 2-6 years depending on the province. Lenders typically have 2 years in most provinces after a borrower’s last payment to file a lawsuit pursuing loan repayment or other civil action.

No, auto loan debt cannot follow you forever in Canada even if it goes into default. The statute of limitations laws means the lender only has a certain number of years specified by each province to take legal action to pursue amounts owed after you default. In BC and Ontario, it is only 2 years in most cases.

A default on a car loan in Canada cannot be removed from your credit bureau history. It can only be removed automatically after remaining on your Equifax and TransUnion credit files for the maximum of 7 years. Continuing to build positive credit is the only way to offset the serious credit damage.

Defaulting on an auto loan can make it very difficult to qualify for a mortgage in Canada even years later. Mortgage lenders view past loan defaults as indicating higher risk of missed payments on a home loan. Prior defaults usually mean much higher interest rates if approved at all.

Most mortgage lenders in Canada will want to see at least 3-4 years of reestablished positive credit history after a car repossession before considering approval for a home loan. Defaulting on any major loan like an auto loan is seen as a red flag for future payment risk by potential mortgage providers.

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