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Getting a Car Loan After Consumer Proposal

Getting a Car Loan After Consumer Proposal

A consumer proposal is a legal procedure available in Canada that allows you to repay your unsecured debts in a structured manner over a period of 3-5 years. It allows you to pay back only a percentage of what you owe based on your ability to pay. A consumer proposal is administered through a licensed insolvency trustee and offers an alternative to declaring bankruptcy.


While you are in a consumer proposal, you may still need to purchase a vehicle. Since a car loan is considered secured debt, it cannot be included in your consumer proposal. However, you can get approved for auto financing while in a consumer proposal, with the right preparations and approach.


This article will explore whether and how you can qualify for a car loan while making payments under a consumer proposal, as well as tips for improving your chances of getting approved.

 

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What is a Secured vs Unsecured Debt?

When considering whether a car loan can be included in a consumer proposal, it’s important to understand the difference between secured and unsecured debts. An unsecured debt is one that does not have any collateral tied to it. Credit cards, personal loans, medical bills, and utility bills are common examples of unsecured debt. These types of debts can be included in a consumer proposal.

A secured debt on the other hand is a loan that is tied to a valuable asset used as collateral. Common secured debts include mortgages, car loans, and home equity lines of credit. The lender can seize the asset if the borrower defaults on the loan. Because the car is used as collateral for the loan, a car loan is considered secured debt. Secured debts cannot be included in a consumer proposal and must continue to be paid separately.

This is an important distinction when it comes to car loans. Since a car loan is secured by the vehicle itself, it cannot be part of the debts reduced or eliminated through a consumer proposal. The car loan remains intact even if you file a consumer proposal for your other unsecured debts.

 

Can a Car Loan be Included in a Consumer Proposal?

A key thing to understand is that a car loan is considered a secured debt, while a consumer proposal only deals with unsecured debt. This is an important distinction.

Unsecured debt refers to any debt or loan that does not have any assets or collateral tied to it. Credit cards, personal loans, medical bills, and utility bills are common examples of unsecured debt. If you stop making payments on unsecured debt, the lender cannot seize your assets.

On the other hand, secured debt is tied to an asset that acts as collateral for the loan, like a house for a mortgage or a car for an auto loan. The asset itself guarantees the debt. So if you default on a secured debt, the lender has the right to repossess that asset to recoup their losses.

Because a car loan is secured debt with your vehicle as collateral, it cannot be included in a consumer proposal. A consumer proposal only covers your unsecured debts. This means you must continue making your regular car loan payments separately while also making the reduced payments on your other debts through the consumer proposal.

The good news is that since the car loan remains separate, you won’t lose your vehicle as long as you keep making payments. However, if you do default on the auto loan, the lender can still repossess your car despite the active consumer proposal.

 

Continuing to Make Car Payments

If you had an existing car loan or lease when you entered into your consumer proposal, you must continue making those payments separately. Car loans and leases are secured debts, meaning the vehicle itself serves as collateral. Since secured debts cannot be included in a consumer proposal, you remain fully responsible for the original repayment terms.

This means you cannot reduce, restructure, or discharge your auto loan or lease| through your consumer proposal. You must continue making your monthly payments as required. If you default on your car payments, the lender has the right to repossess the vehicle, even while you are in a consumer proposal.

The good news is that if you stay current on your auto loan or lease, you get to keep driving your vehicle throughout your consumer proposal. Your car cannot be seized or taken away as long as you uphold your end of the financing agreement. So staying on top of those payments is critical.

 

Getting Approved for a New Car Loan

Getting approved for a new car loan while you are in a consumer proposal can be very challenging, but it is possible with the right lender. The main hurdle is that being in a consumer proposal has likely damaged your credit score, which makes most mainstream banks and lenders hesitant to approve you.

However, some private lenders and specialized auto financing companies are more flexible and willing to work with borrowers who have active consumer proposals. The key is finding a lender who understands your unique situation and is able to look beyond your credit score alone when evaluating your application.

These types of lenders realize that just because you have credit challenges does not mean you are unreliable or unable to make your payments. They will dig deeper to verify your income, expenses, and other signs that you can manage this new loan responsibility.

Having a previous solid track record of on-time payments with your existing car loan or consumer proposal will also help demonstrate that you take your financial commitments seriously. While it may take some persistence and contacting several potential lenders, approval is possible if you find the right financing partner.

 

Working with Private Lenders

When trying to get approved for an auto loan during a consumer proposal, working with private lenders can be more fruitful than going through a traditional bank. Private lenders tend to be more flexible and open-minded when it comes to applicants with challenged credit.

Banks and other mainstream lenders generally rely on strict credit requirements and debt-to-income ratios. They may automatically decline anyone in an active consumer proposal. Private lenders, on the other hand, look at your entire financial profile. This includes factors like your down payment, co-signer, proof of current income, and history of consumer proposal payments.

Private lenders understand that people going through a consumer proposal still need transportation. They are often willing to work with these applicants to find loan options that fit their budget and situation. Their flexibility and customized approach makes them an ideal financing partner when your credit is less than perfect.

 

Importance of Down Payment

One of the most important things you can do to improve your chances of getting approved for an auto loan during your consumer proposal is to make a large down payment. Lenders view a substantial down payment as an indication that you are financially committed to the vehicle purchase. It also immediately reduces their risk exposure, since you are putting your own money into the deal upfront.

Aim to put down at least 20-30% if possible. This shows the lender you are serious and have the funds available. While some subprime lenders may approve loans with little or no money down, your chances go up dramatically with a 20%+ down payment. Having this capital reserves demonstrates financial responsibility.

Saving up over time for a more substantial down payment before applying for a loan is advised. Work this into your budget as you go through the consumer proposal process. Banks will be more likely to approve your application when they see you have made a concerted effort to accumulate savings for a solid down payment. That reduces their lending risk and provides them with reassurance.

 

Having a Co-Signer

One of the best ways to improve your chances of getting approved for a car loan while in a consumer proposal is to bring on a co-signer with good credit. A co-signer is someone who agrees to be legally responsible for repaying the auto loan if you are unable to make the payments yourself. Most lenders will look more favourably on your application if there is a co-signer attached with a high credit score and solid income.

When you have bad credit due to financial struggles that led to your consumer proposal, it can seem very risky to a lender to approve you for new financing. But if they see a co-signer with excellent credit standing behind the loan, it gives them much more confidence that the payments will be made on time each month. The co-signer provides a safety net for the lender.

To qualify as an effective co-signer, this person will need a credit score of at least 700 and preferably higher, as well as a steady income and limited existing debts. They should have enough monthly income to be able to take over the car payments comfortably if necessary. The higher the co-signer’s income and credit score, the better.

Having a family member or friend with good credit co-sign on your auto loan can significantly increase the chances that your application will be approved. Make sure you only ask someone who you completely trust and who understands the responsibility they are taking on. A co-signer could end up being legally obligated to repay some or all of the car loan if you default, so it is a big commitment.

While a co-signer is not required, having one can make a major difference in getting a car loan approved while you are still in your consumer proposal. If you know someone who may be willing to co-sign, it is certainly worth having the conversation and providing proof to the lender that a co-signer will be attached to the application.

 

Proving Regular Proposal Payments

One of the most critical factors for getting approved for a car loan during a consumer proposal is being able to prove you are making all your proposal payments on time. Lenders will want to see evidence that you are reliably meeting your obligations under the proposal before they will consider you for a new auto loan.

Be prepared to provide your lender with documentation verifying your payment history for the consumer proposal. Your licensed insolvency trustee who is administering your proposal can provide a letter confirming your payment status and history. Having several months of on-time payments will go a long way in reassuring potential lenders.

Keep copies of cancelled checks, bank statements, or other payment receipts showing each month’s consumer proposal payment was made in full and on time. The more evidence you can provide of timely payments, the better. This will demonstrate you can be trusted to make regular payments on a new car loan as well.

During the application process, be upfront with lenders about being in an active consumer proposal. Explain the situation and have your documentation ready to share. Lenders will likely review your proposal payment history closely, so having a track record of consistent on-time payments will be to your benefit.

While lenders may be cautious about new financing for someone in a proposal, showing you are holding up your end of the bargain goes a long way. Making regular on-time payments builds trust and improves your chances of a lender taking a risk on you despite your proposal.

 

Rebuilding Your Credit

One of the most important things you can do while in a consumer proposal is focus on rebuilding your credit. Paying all your payments on time going forward is critical. Your payment history makes up a significant portion of your credit score. By making sure you don’t miss any consumer proposal payments, auto loan payments, or payments on any other accounts, you will demonstrate responsibility.

In addition to on-time payments, you may want to consider opening a new credit card account if you qualify. Having an additional open and active account that you pay on time every month will help strengthen your credit profile. Just be sure not to take on more debt than you can handle.

Avoid applying for too much new credit at once, as multiple hard inquiries can temporarily ding your score. Be strategic and patient. Rebuilding strong credit takes time, but being diligent with on-time payments and keeping credit card balances low will help get you back on track.

 

Saving Up over Time

One of the best things you can do to improve your chances of getting approved for a car loan during your consumer proposal is to save up money for a larger down payment. Lenders will be reassured if you can make a down payment of 20% or more on the vehicle purchase price. This shows you are financially committed to the loan and have the means to make a serious investment upfront.

Try to sock away as much as you can afford each month in a savings account earmarked for your car down payment. Cut back on non-essential spending if needed to boost your savings rate. Having $5,000, $10,000 or more to put down will make lenders much more likely to approve your application despite the active consumer proposal.

The larger down payment also means you will have to borrow less money. This reduces the lender’s risk since your loan balance will be lower. Make paying down a hefty down payment a top priority as you work toward getting approved for a car loan during your consumer proposal.

 

Being Persistent

Getting approved for a car loan while in a consumer proposal will likely take persistence and applying to multiple lenders. The first lender you approach may deny your application due to your credit situation. But don’t let a rejection discourage you. Every lender has their own approval criteria and risk tolerance. One lender may turn you down while another approves your loan. You may need to put in applications with several lenders before finding the right match.

Cast a wide net and apply to a range of lenders, from small private lenders to larger financing companies. Expand your search beyond just banks and dealerships. The more lenders you contact, the better your chances of getting approved. Being persistent and not giving up after the first “no” you hear is key.

Along with persistence, patience is important. The application and approval process takes time, especially for applicants in your situation. Follow up with lenders frequently to check on the status of your application. Be patient but proactive in pursuing multiple lenders to find the right loan program for your needs.

 

Understanding the Risks

While getting approved for auto financing during a consumer proposal is possible, it’s important to understand the risks involved if you end up defaulting on the car loan. Since a car loan is a secured debt, the lender can repossess your vehicle if you fall behind on payments or fail to uphold the terms of your loan agreement.

Here are some key risks to be aware of with defaulting on an auto loan during a consumer proposal:

 

  • Vehicle Repossession – The lender has the legal right to repossess your car if you default. This means they can take back the vehicle and sell it to recoup their losses.
  • Owing Loan Balance – Even after the lender sells the repossessed car, you may still owe the balance left on the auto loan if the sale amount doesn’t cover it. This remaining balance would be an unsecured debt.
  • Credit Score Damage – Having your vehicle repossessed can severely hurt your credit, making it even harder to qualify for loans in the future.
  • Transportation Difficulties – Losing your vehicle can leave you without reliable transportation to get to work, school, appointments, etc.
  • Fees and Penalties – You may owe towing/storage fees, auction fees, late fees, and other penalties associated with the repossession process.

 

As you can see, defaulting and losing your vehicle creates a difficult situation. It can set back your financial recovery, credit rebuilding efforts, and leave you stranded. This is why it’s so important only to take on an auto loan you can realistically afford based on your budget and circumstances.

 

Other Transportation Options

If you are unable to qualify for auto financing during your consumer proposal, there are still options to get around without your own vehicle:

 

Public Transit

Most cities and towns have public bus systems that can be an affordable way to commute. Monthly or annual passes are often available at a discount. Planning your route ahead of time can make public transit an efficient option.

 

Biking

Cycling is a low-cost and environmentally friendly mode of transport. Investing in a reliable bike and safety equipment can get you where you need to go. Bike shares are also available in some cities.

 

Carpooling

Arranging to carpool with coworkers, friends, or neighbors is a great way to share the costs and responsibilities of driving. There are even apps to connect you with people looking to carpool.

 

Car Sharing

Services like Zipcar allow you to rent vehicles by the hour or day. While not cheap, it can give you access to a car when you really need one. There are also peer-to-peer car sharing marketplaces.

 

Ride Sharing

Using Uber, Lyft, or a taxi gets you from point A to point B without having to drive or own a car. While more costly than owning a car, it’s there when you need it.

With a mix of alternative transportation options, it’s possible to get by without a personal vehicle during your consumer proposal.

 

Conclusion

Getting a car loan while you are in a consumer proposal can be challenging but is possible under the right circumstances. Being prepared with a down payment, co-signer, and proof that you are meeting all your consumer proposal payment obligations will help your chances. With some persistence and the help of an understanding lender, you can get auto loan approval even during your consumer proposal.

In summary, a car loan is considered secured debt and cannot be included in your consumer proposal. You must continue making payments separately. While most mainstream lenders will be hesitant to approve you, some private lenders specialize in lending to those with credit challenges. Having a large down payment, bringing a creditworthy co-signer, and showing all your proposal payments are up to date will improve your chances significantly.

Getting reliable transportation is often necessary during a consumer proposal. With proper planning and preparation, you can get financed for a vehicle while rebuilding your credit through your proposal. Just be sure to carefully consider the risks, have patience, and explore all your options. With time and dedication, you can get back on the road to financial recovery.

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Can I Get a Car Loan After a Consumer Proposal?

A consumer proposal is an alternative to bankruptcy that allows you to repay only a percentage of your debt based on your ability to pay. Secured debts like car loans are excluded from consumer proposals. However, you may still qualify for a car loan from a private lender while in a consumer proposal if you have proof of consistent payments. The interest rate may be higher to offset the extra risk.

The best way to improve your chances is to get pre-approval from a private lender specializing in subprime borrowers and show proof that you have been making your proposal payments on time. Also, try to put down a larger down payment if possible. Having a co-signer with good credit will also make approval much more likely. Maintaining any open credit accounts in good standing can help demonstrate you are working to rebuild your credit.

When applying for a car loan, you will need to provide proof that you have an active consumer proposal, documentation showing 12 months of consistent and on-time proposal payments, proof of income, a down payment if possible, details on the vehicle you wish to purchase including the VIN number and purchase price, and possibly a co-signer if you have poor credit.

Yes, being in an active consumer proposal will negatively impact your chances due to the hit to your credit score and report from the proposal itself. However, some private subprime lenders specialize in lending to borrowers with consumer proposals and bankruptcies. The interest rate will likely be higher to account for the increased risk.

Expect to pay a much higher interest rate for a car loan while in an active consumer proposal, likely in the 15-25% range depending on the lender. This factors in the increased risk posed by your damaged credit and reduced ability to service debt. Shop around for the best rate possible based on your specific situation.



It’s generally better to wait if possible, as your credit score should rebound once your proposal is completed and will qualify you for much lower interest rates. However, if you need a vehicle now for work or other essential transportation, getting a higher interest loan during the proposal term may be your only option.



Your best options are private subprime lenders that specialize in financing vehicles for those with bankruptcies, proposals, collections, and other serious credit issues. Banks and mainstream lenders typically will not approve borrowers currently in a proposal.



No, 0% financing deals are only offered to borrowers with very good credit, as they represent the lowest risk. Expect to pay much higher interest rates during your consumer proposal term no matter where you get financing. The best rates will likely still be over 15%.

Yes, you can trade in a vehicle you currently own toward the purchase of another. Any positive equity would simply reduce the amount you need to finance. Just be aware that you will not likely get top dollar due to your credit situation. Shop around for the best value.



Typical documents needed include your proposal documentation, proof of 12+ months of on-time payments, recent pay stubs or bank statements showing income, tax returns if self-employed, a down payment if possible, details on the vehicle like VIN and selling price, possibly a valid co-signer, and photo ID.

No, secured debts like vehicle loans or leases cannot be included in a consumer proposal. You would need to voluntarily surrender the vehicle or continue making payments as agreed if you wish to keep it. Defaulting could allow the creditor to repossess the vehicle.

If you default on your auto loan, the lender can repossess the vehicle at any time just as they normally would. This would also negatively impact your credit. Be very careful only to finance what you can realistically afford based on your budget and proposal payment amount.



Some options to search for subprime lenders that work with consumer proposals include CarLoansCanada.com, CanadaDrives.ca, CarFinco, AutoLoans.ca, DC Finance, and other private finance companies. Individual dealerships may also offer financing assistance.



Yes, you should always fully disclose your credit situation when applying for financing. Failing to mention an active proposal could be considered misrepresentation later on if discovered. The lender will run your credit report which will show the proposal anyway. Honesty is the best policy.

Most mainstream lenders require at least 12-24 months of good payment history after a major credit event like a proposal before considering your application. However, some private subprime lenders are more flexible for those recently discharged from a proposal. Shop around for your options.

The maximum loan amount will vary widely depending on your income, existing debts, down payment, and other factors the lender evaluates related to affordability and risk. Expect approved amounts to be lower than normal until you rebuild your credit. Prepare to put down 20% or more if possible.

 

Yes, having a co-signer with good credit is one of the best ways to boost your chances of getting approved for a car loan while in an active consumer proposal. It gives the lender another party to pursue if you end up defaulting on the loan. Make sure the co-signer understands the risks.



It’s generally wise to avoid applying for additional credit before your proposal is completed, as adding new inquiries and accounts now can slow down the process of rebuilding good credit later on. Get through the proposal term relying on as few credit accounts as possible.



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