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 circ*mstances.
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.
