Auto Loans, Car Financing, and Debt: What to Do When Payments Become Too Heavy?

An auto loan can become hard to pay when your budget has no room left. This often happens when credit cards, personal loans or lines of credit start piling up.

However, for many people, a car is still essential. They need it to get to work, drive the kids around or run errands.

If you are struggling to pay your car financing, take stock of your finances before missed payments add up.

In this article, we explain the solutions that can help you take back control of your debts. Some of them could even allow you to keep your vehicle.

Why Can an Auto Loan Become Hard to Manage?

An auto loan becomes hard to manage when your payments exceed what you can realistically repay. Indeed, the car payment comes on top of your other expenses and debts.

Also, the cost of a vehicle goes beyond its financing. You also need to budget for insurance, gas, maintenance, repairs and registration. As a result, these costs can weigh heavily on a budget that is already fragile.

Several situations can explain these financial difficulties:

• A drop in income or a job loss that leaves less money for payments;
• Credit cards and lines of credit that you use to cover everyday expenses;
• Interest rates and minimum payments on several debts that leave little room to manoeuvre;
• An unexpected repair or essential expense that throws your budget off balance;
• A monthly car payment that is too high for your available income.

For example, someone may manage to pay their auto loan every month. However, they no longer have enough money left for their credit cards and utility bills (Hydro, cell phone, etc.).

In that case, you should look at your whole financial situation, not just your car financing.

Is an Auto Loan a Secured Debt?

A secured debt is tied to an asset that guarantees repayment. So with car financing, the creditor may have rights over the vehicle, depending on the contract you signed.

On the other hand, an unsecured debt is not tied to any specific asset. For example, credit card balances and many personal loans are unsecured debts.

This distinction matters when you look for a debt solution. For instance, a consumer proposal deals with eligible unsecured debts. However, it does not automatically settle your auto loan, and it does not guarantee that you can keep your vehicle.

What Should You Do If You Are Behind on Your Auto Loan Payments?

If you are behind on your car payments, here are the steps we recommend before you choose a debt solution:

Review Your Auto Loan Contract

First, read the terms on late payments, fees and the creditor’s possible remedies. Then, check the remaining balance and the conditions of your loan.

If you are thinking about selling the vehicle, find out how to settle the financing. Also check whether you would still owe money after the sale.

Contact Your Creditor

Next, explain your situation to the creditor and ask what options are available. Depending on the contract and the circumstances, a conversation may open some doors before things get worse.

However, do not assume the creditor will automatically agree to change or defer your payments.

If the creditor offers an arrangement, ask them to spell out the terms clearly.

Take Stock of All Your Debts

Then, list all your monthly payments: auto loan, credit cards, lines of credit, personal loans, rent or mortgage, groceries, insurance and other essential expenses.

This overview will help you find the source of the problem. Does it come mainly from the cost of the vehicle, or from more general debt? If you realize you have too much debt, rest assured that solutions exist!

Ask for a Professional Assessment

Finally, a Licensed Insolvency Trustee can help you understand your options for managing your debt. The trustee looks at your income, your debts and your personal situation.

The consultation is free. It also lets you compare debt consolidation, a consumer proposal and personal bankruptcy. Besides, you are under no obligation to choose any solution.

Can You Keep Your Car With a Consumer Proposal?

It is sometimes possible to keep your car during a consumer proposal. However, it depends on the financing, the payments, the contract and your ability to keep paying.

The Bankruptcy and Insolvency Act governs consumer proposals. In certain circumstances, this procedure lets you offer all your creditors a repayment arrangement for your eligible debts. Generally, it reduces the total amount you owe, and you no longer pay interest.

On the other hand, the auto loan must be reviewed separately when the vehicle serves as collateral. To keep a financed car, you must meet the obligations in your contract. You also need to be able to make the monthly proposal payments.

Furthermore, your budget must cover the costs of the vehicle while you respect the terms of the proposal and your other financial obligations.

In short, a consumer proposal does not guarantee that you can keep the vehicle. Everything depends on your file.

To better understand this procedure, read our article on the consumer proposal.

What Happens to Your Car in a Personal Bankruptcy?

Filing for bankruptcy does not necessarily mean losing your car. If you still have financing on your vehicle, you need to check the loan conditions, the remaining balance and your ability to keep paying.

If your car is fully paid off, then its value comes into play. The trustee checks whether the rules allow you to keep the vehicle and how much of its value the law can protect. Also, the situation may change if you own a house, savings or other assets.

Therefore, consult a trustee before you choose a solution. They will review your situation and explain how a bankruptcy would affect your car and your other assets.

Should You Sell Your Vehicle to Pay Off Your Debts?

Selling your vehicle can sometimes ease financial pressure. However, it is not always the best solution, especially if you need the car to work or earn an income.

Before you decide, compare the real cost of the vehicle with another option. Consider the remaining financing, insurance, gas, maintenance and the price of another vehicle if you need to buy one.

Also check whether the sale price will cover the full amount you owe, or whether you will still owe a balance.

On the other hand, your vehicle may cost much more than your budget allows. If affordable transportation options exist, selling it could then help you restore your financial balance.

So your decision should take into account your needs, your debts and your ability to handle future expenses.

Debt Consolidation, Consumer Proposal or Bankruptcy: Which Solution Should You Choose?

The best solution depends on how much you owe, your income, your eligibility and your ability to make payments.

Debt consolidation generally combines several debts into a new loan with your bank or credit union. It can simplify your payments. However, you must qualify, and the terms must be advantageous.

Also, it does not necessarily solve the problem when your budget cannot handle the monthly payments, or when your debt keeps growing.

A consumer proposal lets you offer your creditors an arrangement, if you are eligible. You then repay only part of your debts, with no more interest. It can resolve unsecured debts, but a secured auto loan still requires a separate assessment.

Personal bankruptcy is another legal procedure that may apply in certain insolvency situations. Its effects on your assets, your vehicle and your debts depend on your file and the applicable rules.

Therefore, a consultation with a trustee will help you compare the pros and cons of each solution before you commit.

Don’t Look Only at Your Auto Loan Payment

When your car payments become too hard to keep up with, it is important to look at your whole financial situation.

Indeed, credit cards, personal loans, essential expenses and vehicle costs (insurance, repairs, maintenance, etc.) can all add to the problem.

You do not have to wait until missed payments pile up before asking for help. Our trustee can assess your situation and show you the solutions available to you.

If your car payments are more than you can afford, book a free phone consultation with Gobeil Syndic.

FAQ

What should I do if I can no longer pay my auto loan?

First, review your contract. Then contact the creditor and take stock of all your debts. A Licensed Insolvency Trustee can then help you compare your options.

Is an auto loan a secured debt?

Yes, when the vehicle serves as collateral for the creditor. So check your financing contract to confirm your rights and obligations.

Can you keep your car with a consumer proposal?

It is often possible. However, it depends on the contract, the payments, the collateral and your ability to keep paying the financing.

Does personal bankruptcy automatically mean losing your car?

No, not automatically. The consequences depend mainly on the value of the vehicle, the financing and the exemptions that apply. Therefore, an individual assessment is necessary.

Should you sell your car to pay off your debts?

Not necessarily. Selling can help in some cases. However, you need to consider the loan balance, the cost of another way to get around and how important the vehicle is for work or family.

When should you consult a Licensed Insolvency Trustee?

Consult a trustee when several monthly payments become hard to manage or when missed payments pile up. It is also the right time if you no longer know which debt to pay first. A consultation will then help you understand your options before you decide.

Book Your Free Call!

Are your debts becoming too heavy and you’re struggling to pay your auto loan?

Schedule a free phone consultation with a GOBEIL SYNDIC advisor to find out which solutions could help you!

We serve every city in Quebec, since everything can be done by phone, email and videoconference.