Car loans are a type of secured debt, which means that they’re attached to a physical asset – in this case, your car. The loan is paid back in monthly installments over a certain period, with interest added on top of the principal amount borrowed. In the end, remember that the choice to hold onto your car in a consumer proposal is yours.

Debts Included in a Consumer Proposal

• Unsecured personal loans
• Credit cards
• Lines of credit
• Quick, high-interest loans like payday loans
• Student loans (but only if you’re seven or more years out of school)
• Income tax debts

A consumer proposal primarily works to eliminate unsecured debts. But remember, your total debts can’t exceed $250,000 (excluding your primary home mortgage).

Defaulting on a Car Loan: What It Means

When you sign on the dotted line and take out a car loan, you’re entering into a legal agreement. You agree to make regular payments until the entire loan amount – along with the interest – is paid off. However, life can throw us curveballs, and you might find yourself unable to make these payments. When you stop making payments or fail to meet the terms laid out in your loan agreement, you’re in what’s known as default.

The first thing that happens when you default on a car loan is that you’re likely to hear from your lender. They’ll start by sending you reminders and then move on to more formal notices. Defaulting can lead to penalties, late fees, and a spike in your interest rate.

But the consequences go beyond annoying calls and letters from the lender. Defaulting on a car loan can negatively impact your credit score. Credit bureaus keep a record of any late or missed payments, and these will show up on your credit report. This record can make it harder for you to borrow money in the future. Lenders view a history of default as a sign of risk, which might lead to higher interest rates or even outright rejection of your loan applications.

One of the biggest worries when defaulting on a car loan is the risk of repossession. Since a car loan is a type of secured loan, your vehicle serves as collateral for the money you borrowed. This means that if you default, your lender has the legal right to seize or “repossess” your car to recover the amount they loaned you. In some cases, the lender doesn’t even need to go to court to repossess the vehicle.

Once your car is repossessed, it’s typically sold to cover the balance of the loan. If the sale price doesn’t cover the total amount you owe, you could still be on the hook for the difference – a situation known as a “deficiency balance.”

How Does a Car Loan Fit into a Consumer Proposal?

As a secured debt linked to a tangible asset (your car), it can’t be included in a consumer proposal. In simple terms, if you want to keep your car, you’ve got to keep up with the payments. If you default, your lender has every right to repossess your car according to your loan or lease agreement terms.

As long as you’re punctual with your car loan payments, filing a consumer proposal won’t touch your car.

What if Your Car Loan Payment is Putting You Under Undue Financial Stress? 

If you’re consistently late on payments, it might be time to talk to your lender about giving back your car and opting for a voluntary repossession.

Don’t beat yourself up if you owe more on your car than its actual worth. Here’s where a consumer proposal can step in and help you ditch a poor car loan setup by considering any car loan deficit as unsecured debt.

Thinking About Refinancing Your Car Loan While in a Consumer Proposal?

If your car loan payments put a dent in your budget but you can’t bear to part with your vehicle, you might consider refinancing. Remember that refinancing isn’t done through the consumer proposal but requires your lender’s agreement. However, filing a consumer proposal might temporarily lower your credit report score, potentially leading to your refinancing application being denied. So, you can refinance before filing a consumer proposal.

Defaulting on a car loan is a serious situation, but remember, it’s not the end of the world. If you’re struggling to make your car loan payments, reach out to us at EmpireOne Credit. Exploring debt management strategies, such as a Consumer Proposal provide some relief in managing your debt situation.

Get Help

Dealing with a car loan in a consumer proposal relies heavily on your finances and choices. If your car payments are too high, exploring more affordable transportation is a good idea. But if you can comfortably handle the loan, there’s no reason why you can’t keep your car and work towards settling other debts. 

Feeling swamped by your finances? Don’t sweat it – EmpireOne Credit has your back. We’re committed to offering you tailored advice and support to effectively steer your financial ship in the right direction. Imagine reducing your debt by up to 80%, and stopping interest immediately. Sounds good, right? Give us a call at (416) 900-2324 and book a free consultation today. Being debt-free feels good!