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Not Paying a Car Loan And The Consequences

Not Paying a Car Loan And The Consequences

Making your monthly car payment is an essential part of vehicle ownership. When you finance or lease a car, you agree to repay the loan on time each month. But life happens, and you may face situations where paying your auto loan becomes difficult or impossible. While it may be tempting to simply stop making payments, defaulting on your car loan can lead to very negative financial outcomes.


Missed payments and loan default should not be taken lightly. Your credit score can plummet over 100 points, lenders can repossess your vehicle, and you may owe additional fees and interest. If the car is auctioned off for less than you owe, you could still face a large deficiency balance. In the worst case, you could end up with no car, damaged credit, and debt collection calls.


However, completely avoiding the issue won’t make it go away. This article will outline the serious impacts of defaulting on auto loan payments in Canada. We’ll also discuss proactive steps you can take if struggling to make payments. The key is being informed on the consequences, and taking quick action to mitigate the fallout.



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Your Credit Score Will Drop

One of the most immediate impacts of missing a car loan payment in Canada is damage to your credit score. Auto lenders are required to report any delinquent accounts to the major credit bureaus, including Equifax and TransUnion, after you are 30 days late on a payment.

Once the missed payment appears on your credit report, it can cause your score to plummet by over 100 points or more overnight. The exact drop will depend on your current score and credit history, but it’s typically quite substantial. Those with good credit in the 700+ range are likely to see it sink below 600.

This sharp decrease in your credit score can have major consequences. It will make it much harder to qualify for other loans or lines of credit in the future. You’ll also have trouble getting approved for credit cards, mortgages, apartment rentals, and more. Landlords and lenders view consumers with poor credit as high risk applicants.

In addition, having an outstanding delinquent auto loan on your report may automatically disqualify you from getting new credit entirely until it’s paid off. So missing payments now can negatively impact your finances for years to come.

 

Late Fees and Interest

When you miss a car loan payment, lenders will typically charge late fees. These are often specified in your original auto loan agreement, and can range from $10-50 per late payment depending on the lender. The fees serve as a penalty to encourage prompt payment.

In addition to late fees, your interest rate may also increase significantly if you default on payments. Most auto loans have a “default” interest rate that is much higher than the original rate – sometimes over 25%. So not only do you still owe the missed payments, but future interest accrues rapidly. This default rate helps protect the lender against non-payment.

Between mounting late fees and sharply increased interest, the amount you owe can snowball quickly once you start missing payments. What began as a single missed payment can spiral into thousands in added costs. This makes it all the more critical to address any payment issues immediately before you fall too far behind.

 

Calls and Letters From Lender

Once you start missing payments, your auto loan lender will likely begin contacting you to request payment. Expect to receive frequent phone calls from the lender as they attempt to collect on the debt. These calls may start out polite, but could become more aggressive and threatening if you continue to avoid payment.

In addition to phone calls, you’ll also receive written notices in the mail informing you that your loan is in default. These letters will indicate how much you owe, request immediate payment, and warn of further action if the default is not resolved. As you go further into delinquency, the tone of the letters will reflect the increasing seriousness of the situation.

It’s important not to ignore the calls and letters from your lender. Communication is key – discuss the situation openly and honestly with them. You may be able to negotiate alternate repayment plans, a short-term deferment, or other options. The worst thing you can do is avoid the issue, as that will only escalate matters further.

 

Potential Vehicle Repossession

After 60-90 days of nonpayment on your auto loan, the lender has the legal right to repossess your vehicle. This means they can send a tow truck or repo agent to seize the car from wherever it is parked, whether that’s your home, workplace, or elsewhere. Repossession can happen without any additional notice beyond the initial late payment notifications you’ve already received.

Once the lender repossesses the car, they will send you a notice informing you of your right to reinstate the loan and recover the vehicle. This requires becoming current on all missed payments, fees, and penalties. If you cannot or choose not to reinstate the loan, the lender will sell the car at auction. The proceeds go towards paying off your outstanding loan balance.

Vehicle repossession has several downsides. First, it damages your credit score even further. It also leaves you without a vehicle, which can severely impact your daily life and ability to earn an income. You may also still owe money on the loan if the car sells for less than what you owed. Repossession should be avoided if at all possible through open communication and working with your lender.

 

Voluntary Surrender

Rather than risking having your vehicle repossessed, you may choose to voluntarily surrender it back to the lender. This involves proactively contacting your auto lender and arranging to return the car. The lender will come pick up the vehicle from your location.

Voluntary surrender can help you avoid some of the fees and additional credit damage that can come with forced repossession. Since you are willingly giving the vehicle back, the lender may be more amenable to waiving certain costs. However, you will still owe any outstanding balance left on the loan after the car is sold off.

Before opting for voluntary repossession, be sure to check the specifics of your loan agreement. There may be clauses that impact the process. Get written confirmation from the lender on what fees or penalties they will waive by taking this route.

While giving up the vehicle proactively puts you in a better position than defaulting entirely, it should still be treated as a last resort if you cannot get caught up on payments through other means.

 

Deficiency Balance

If the proceeds from auctioning off your repossessed vehicle do not fully repay the outstanding loan balance, you will still owe the deficiency. This remaining debt is known as a deficiency balance. After a lender sells the vehicle, they will notify you of the deficiency amount you still owe.

For example, if you originally financed $20,000 for a car but still owed $15,000 when it was repossessed and sold for $10,000 at auction, you would have a $5,000 deficiency balance. The lender would expect you to continue making payments on this amount or otherwise repay it in full.

A deficiency balance can be pursued through the same collection methods as any other unsecured debt. The lender can send the balance to collections, damage your credit further, and potentially sue you to garnish wages if you do not pay. Satisfying the deficiency balance should be a top priority, as failing to do so only worsens the financial impacts.

 

Legal Action and Wage Garnishment

If the sale proceeds from repossessing and auctioning your vehicle do not fully repay your outstanding auto loan balance, the lender may pursue legal action to recoup the remaining debt. This can result in the lender filing a lawsuit against you to obtain a court judgment for the deficiency balance.

If they receive a favorable judgment, the lender can then pursue various paths to force repayment. One option is to request wage garnishment, which allows them to legally collect a portion of your paychecks until the judgment is satisfied. Depending on the laws in your province, up to 30% of your disposable earnings could be garnished.

Wage garnishment can be a huge financial burden, making it difficult to pay your regular living expenses. The unpaid judgment debt can also significantly damage your credit standing for years to come.

Seeking legal action is usually a lender’s last resort after all other collection efforts have failed. However, if you stop making payments and become unresponsive, you make the legal path much more likely. This makes it critical to maintain communication with your lender and explore every alternative if you get into financial hardship.

 

Damage to Future Loan Prospects

Defaulting on an auto loan can make it much more difficult to qualify for other types of financing in the future. Lenders view borrowers who have defaulted as high risk, since they have already demonstrated an inability or unwillingness to repay debts.

A default stays on your credit report for up to 7 years. During that time, potential lenders will see it when they pull your credit history. This can lead to credit card and loan applications being denied, or only being approved at much higher interest rates.

Some specific financing situations where having defaulted on a previous auto loan can hurt include:

 

  • Applying for a mortgage – Lenders want to see a strong history of on-time payments for large loans.
  • Leasing or financing another vehicle – auto lenders view past defaults as a major red flag.
  • Getting approved for rental housing – landlords often check credit and may deny applicants with poor credit scores.
  • Taking out student loans – while not impossible, it can be harder to get approved and at favorable rates.

 

Essentially, any situation where your creditworthiness affects the terms and availability of financing, having defaulted on a prior auto loan works against you. This makes it critical to avoid default if at all possible, and take steps to begin rebuilding your credit as soon as you can after a default.

 

Options If Struggling

If you anticipate having trouble making your monthly car loan payments, it’s crucial to be proactive and explore all options before defaulting. There are several steps you can take to potentially get your payments back on track:

 

Prioritize Communication

First and foremost, contact your auto lender as soon as you think you may miss a payment. Explain your situation and ask about possible alternatives. Most lenders want to work with borrowers, when possible, to avoid default. The earlier you reach out, the more options they may have available to help.

 

Weigh Voluntary Surrender

Voluntarily surrendering the financed vehicle back to the lender is one option if you simply cannot afford the payments anymore. This requires proactively contacting the lender and arranging to return the vehicle. While you take a credit hit and lose the car, it may prevent some fees and legal consequences of an involuntary repossession down the road.

 

Explore Debt Management

Non-profit credit counseling agencies can often help negotiate with lenders for reduced interest rates or extended repayment terms. They may also help consolidate debt into a debt management plan with one affordable monthly payment. This won’t make the debt disappear but can provide some temporary relief.

 

Know Your Options

Before deciding anything, understand all the alternatives – and consequences – available to you. Don’t let the vehicle be repossessed without first pursuing every option to get your payments back on track, even if that means voluntarily surrendering the car.

 

Prioritize Communication

If you anticipate having any trouble making your monthly car loan payments on time, it’s absolutely critical that you contact your auto lender right away. Don’t wait until you’ve already missed a payment. As soon as you foresee potential issues, get in touch with the lender.

Let them know your situation and that you may need some temporary relief or alternative repayment options. Most lenders would much rather work with borrowers proactively than deal with a defaulted loan. So they’ll likely be receptive to discussing solutions, especially if you reach out before officially missing any payments.

Potential options could include a short-term payment deferral, extending the loan term to lower payments, refinancing the loan, or voluntarily surrendering the vehicle. But you need to start the conversation to learn what might be feasible in your specific circumstances.

The worst approach is to avoid or ignore communications from the lender. That will only escalate the situation, making it more challenging to get back on track. As difficult as it may be, you need to talk to them right away if problems arise. That gives you the best shot at protecting your credit, avoiding repossession, and resolving the issue with the least financial damage.

 

Weigh Voluntary Surrender

Rather than risking repossession down the road, you may want to consider voluntarily surrendering your vehicle to the lender. This involves proactively contacting your lender and arranging to return the car. While certainly not ideal, voluntary surrender can help avoid some of the harshest consequences of a forced repossession.

The main advantage of voluntary surrender is preventing further late fees, penalties, and negative impacts to your credit. Once you return the vehicle, the lender can sell it to recoup their losses without having to resort to repossession. This also gives you more control over the timing rather than waiting for the repossession shoe to drop.

That said, voluntary surrender means giving up your vehicle. You’ll need to line up alternate transportation. Public transit, carpooling, biking, or walking may have to suffice in the interim. Review your budget to see if losing the car payment helps free up funds to get by without it for a while.

Before choosing voluntary surrender, calculate any potential deficiency balance you may still owe if the sale of the car doesn’t fully repay your loan. Also research whether voluntary surrender could still be noted on your credit report. If so, the credit impacts may not be avoided entirely.

Overall, voluntary vehicle surrender puts you back in control and may limit further negative consequences if done strategically. It could be the most viable option if you know you can no longer afford the monthly payments.

 

Explore Debt Management

If you’re struggling with multiple debts beyond just your auto loan, debt management solutions may help you get back on track. Two options to consider are debt consolidation and consumer proposals.

With debt consolidation, you take out a new loan to pay off multiple existing debts. This combines all your payments into one lower monthly payment. Consolidation loans can sometimes offer better interest rates, helping you pay off debt faster. Be wary of predatory lenders charging high fees or interest for consolidation loans.

A consumer proposal is a formal payment plan negotiated through a licensed insolvency trustee. It allows you to repay only a portion of your total debt under new terms. Payments are based on what you can afford. At the end of the proposal, your remaining debts are legally discharged. This stays on your credit report for 3 years after completion. Consumer proposals must be approved by creditors representing at least 66% of the total debt amount.

Consult an accredited debt counselor to see if debt management solutions make sense for your situation. They can provide guidance tailored to your needs.

 

Know Your Options

If you’ve fallen behind on your car loan payments, it can feel overwhelming and like nonpayment is your only choice. However, ignoring the situation often makes it worse. Before assuming you have no options, thoroughly explore all alternatives. Your lender likely wants to find a workable solution since repossession and legal action also come at a cost to them.

Don’t wait for the calls demanding payment. Reach out proactively to discuss your situation. Explain why you are struggling to make payments and ask what solutions may be available. There are often options like:

 

  • Temporary payment reduction or deferral
  • Loan term extension to lower the monthly payment
  • Refinancing the loan at a lower interest rate

 

While voluntary surrender should be a last resort, it may be the best option if your financial hardship is long-term. This requires giving up the vehicle but avoids some of the harshest consequences of repossession.

If you’ve tried all alternatives, negotiate reasonable payment arrangements before debts get sent to collections. Get any agreements for reduced or deferred payments in writing. Don’t simply ignore calls and letters from your lender and assume nonpayment is your only choice – be proactive.

 

Conclusion

Defaulting on an auto loan has serious financial repercussions that can be difficult to recover from. To recap, missed payments will damage your credit score, result in late fees and higher interest charges, and lead to persistent calls and letters from your lender. If the default continues, the vehicle could be repossessed and sold off at auction.

Even after repossession, you may still owe a deficiency balance if the sale proceeds don’t cover the full loan amount. Lenders can sue for this balance and garnish wages until it’s paid off. Your future loan prospects will suffer due to the damaged credit and history of missed payments.

The best course is to prioritize communication with your lender at the first sign of trouble. Explore options like voluntary surrender to avoid repossession if you can no longer afford the payments. While defaulting may seem like an easy short-term solution, it creates long-term hardship that can be challenging to overcome. Acting quickly and responsibly gives you the best chance at minimizing the harm.

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Questions About Not Paying a Car Loan

If you stop making payments on your car loan, the lender can repossess your vehicle in Canada. After a few missed payments, the lender will send you notices letting you know you are behind and need to catch up on payments. If you continue to miss payments, the lender has the legal right to repossess the vehicle that is collateral for the loan. They may hire a repossession company to pick up the vehicle from your home or other location. Once repossessed, the vehicle will be sold at an auction and you will still owe any remaining balance on the loan after the sale proceeds are applied. Your credit score will also take a major hit which can negatively impact your ability to qualify for loans, mortgages, and other credit products in the future.

The main consequences of defaulting on a car loan in Canada include:

 

– Vehicle repossession – The lender can seize your car and sell it to recover unpaid loan amounts.

 

– Owing a balance – If the vehicle sells for less than what you owe, you will still be responsible for paying the remaining loan balance.

 

– Credit damage – Defaulting can severely lower your credit score, making it very difficult to qualify for other loans or credit cards.

 

– Legal action – The lender can take legal steps like sending your account to a collection agency or suing you to collect on the unpaid debt.

 

– Higher interest rates – Even after paying the loan, your credit score could be damaged for years, resulting in higher interest rates on future loans.



If you can no longer afford your car loan payments in Canada, here are some options to consider:

 

– Refinancing – You may be able to lower your monthly payments by refinancing your loan at a lower interest rate.

 

– Payment deferral – Ask your lender if they offer temporary payment deferral programs for those facing financial hardship.

 

– Voluntary surrender – You voluntarily return the car to the lender so they can sell it and apply the proceeds to your outstanding loan balance.

 

– Selling the vehicle – If your loan balance is less than the car’s value, consider selling it privately and using the money to pay off your loan.

 

– Debt management program – Work with a non-profit credit counselling agency to set up a structured debt repayment plan.

 

– Consumer proposal – Work with a licensed insolvency trustee to make a legally binding offer to your creditors to repay a percentage of what you owe.

 

– Bankruptcy – Declaring bankruptcy will eliminate the remaining car loan debt but will also negatively impact your credit for several years.



Yes, you can voluntarily surrender your financed vehicle back to the lender if you can no longer afford the payments. The lender will sell the vehicle and apply the sale proceeds towards your outstanding loan balance. However, if the vehicle sells for less than what you owe, you will still be responsible for the remaining loan balance. Before surrendering, review your loan contract to understand what fees you may be charged in this situation. Be aware that damage to your credit score can make financing a replacement vehicle challenging. Consider all options, like selling privately, before returning the vehicle.

Defaulting on your car loan can severely damage your credit in Canada. After only a few missed payments, the delinquency will be reported to the credit bureaus. This causes your credit score to plummet making it difficult to qualify for other loans or credit products. Even after eventually paying the loan in full, the default can remain on your credit report for up to 7 years causing ongoing score impacts. Some ways a car loan default hurts your credit specifically include:

 

– Major drop in credit score (100+ points)

 

– Difficulty getting approved for mortgages, loans, or cards

 

– Higher interest rates charged due to poor credit history

 

– Potential need for co-signer to qualify for financing

 

– Very challenging to rebuild credit for years



No, lenders cannot legally repossess your vehicle on the same day you miss a payment in Canada. There is a process the lender must follow when payments are missed on a secured auto loan. First, you would receive written notices explaining you have fallen behind on payments and need to pay the past due amount. After 60-90 days of non-payment, the creditor may then choose to begin the repossession process by sending a repossession company to collect the vehicle. Out of fairness, Canadian laws provide consumers reasonable timeframes and notifications before a lender can seize collateral like a financed car.



If your financed vehicle is repossessed in Canada, you still have certain legal rights including:

 

– Right to recover personal property in the vehicle before repossession or immediately after.

 

– Right to receive written notice of repossession from lender with amount owed.

 

– Right to reinstate the loan by paying all missed payments, fees and charges within set time limits.

 

– Right to receive notification from the lender if they plan to sue you for any balance still owing after vehicle is sold.

 

– Right to receive accounting report showing sale proceeds, fees deducted and any remaining balance.

 

– Right to negotiate with lender for payout options if deficiency balance remains after sale.

Wage garnishment is generally not an option for auto loan lenders in Canada. If you default on a car loan, the primary ways a lender can collect in Canada are repossessing and selling the secured vehicle, or potentially suing you for the remaining deficiency balance. Unlike some other debt situations, the lender cannot obtain a court order to have your employer automatically deduct loan payments from your salary. However, if they sue you and obtain a legal judgment, other assets besides wages could potentially be seized to repay the debt owing.



Voluntarily surrendering your financed vehicle back to the lender means you return the vehicle to them, so they can sell it to pay off your outstanding loan balance. Benefits include avoiding repossession fees and towing/storage costs. However, you will still owe any loan deficiency between the selling price and your balance after the lender auctions the vehicle. Your credit score will also still take a major hit. After surrendering the vehicle, be sure to retrieve any personal belongings. Also request written confirmation of surrender from the lender detailing your remaining deficiency balance if applicable.

 

Yes, if you have trouble paying your auto loan due to financial hardship like job loss, you may be able to negotiate alternative arrangements with the lender. Options to discuss include:

 

– Temporarily reducing or deferring payments if you have short-term cash flow issues.

 

– Voluntarily surrendering the vehicle to avoid repossession/collection costs.

 

– Refinancing your loan term or interest rate to lower payments.

 

– Settling – Paying lump sum less than full balance owing.

 

Document your financial situation clearly so the lender understands your challenges. Negotiating in good faith shows you intend to repay but just need some accommodation due to extenuating circumstances.

If you move to another province or country with a financed vehicle, you must still continue making timely payments per your original loan agreement in Canada. Otherwise, the lender can report the delinquency, send your account to collections, or pursue legal action to collect on the debt or repossess the vehicle. If you permanently move, you may be able to work with the lender to transfer the loan to a lender in your new location. Make sure to check the laws in your new jurisdiction regarding collections, interest rates, repossession rules etc. to understand how relocating impacts your rights and responsibilities with the loan.



No. In Canada, lenders must follow legal procedures for repossessing a vehicle including sending you written notices when you default before they can seize your car. Showing up without notice and taking your vehicle would be illegal. After providing notifications giving you time to become current on the loan, the lender can then hire a repossession company. If they are unable to contact you to arrange turning in the vehicle, it may be taken from a public location without your direct knowledge. But several warnings must be issued beforehand informing you of the intent to repossess if payments aren’t made.



No, you cannot keep the license plates if your financed vehicle is repossessed by the lender in Canada. Vehicle license plates are registered to the owner of the car, which is the lienholder (lender) on a financed vehicle until the loan is fully repaid. So the plates stay with the vehicle when it is repossessed. The new buyer at auction will need to properly register the vehicle in their name with the government motor vehicle authority and get new plates issued under the new owner. The lender will remove and retain the plates when taking possession of the vehicle after you default on the loan.

If you file bankruptcy in Canada with an outstanding car loan balance, you have two options:

 

  1. Keep Vehicle – You can choose to keep making payments and retain possession of the vehicle if you get court approval to take on the car loan debt personally. This debt will not be discharged by your bankruptcy.

 

  1. Surrender Vehicle – If unable to continue payments, surrendering the car to the lender allows them to sell it and apply funds to your loan. Any balance remaining after sale gets included with your other eligible debts to be forgiven under your bankruptcy.

 

Either way, the car loan lender will have to submit a claim in your bankruptcy for amounts owing. Speak with your licensed insolvency trustee to understand impacts to your vehicle and finances when filing.

In Canada, lenders cannot immediately repossess your car after just one missed payment. They must send written notices when you default on a loan, and provide a reasonable period for you to pay before seizing your vehicle. Typically lenders will begin issuing notices after just 30 days overdue. If non-payment continues for 60 days or longer, they may assign a repossession company to secure the vehicle. The entire default and repossession timeline usually spans 90 to 120+ days from the initial missed payment. Check your loan agreement as some lenders may wait longer before starting repossession.

No, in Canada having your car repossessed for missing only one loan payment is not legal. After a single missed installment, your auto lender can report your account delinquent, charge late fees, or send notices demanding payment. But they cannot lawfully take your vehicle after just 30 days overdue. Repossession would only begin following 60+ days of non-payment, default notices, and failure to become current. Provincial laws also require lenders provide appropriate warnings and a reasonable window for consumers to remedy the default before seizing collateral like a financed automobile.

Making partial, but consistently late payments on your car loan can still lead to default and potential repossession in Canada. Most loan agreements require the exact monthly installment to be paid completely no later than the due date. Paying chunks late will result in repeated overdue notices, late charges, credit damage and could ultimately prompt collections activity if left unchecked. Communicate directly with the lender if facing financial hardship rather than arbitrarily sending partial sums. Discuss options like temporary deferrals, interest rate reductions etc. to help avoid repossession while normalizing payments.

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