Let’s face it. The cost of owning a vehicle has increased significantly in the past few years. Between increased interest rates, inflation, and rising auto prices, many Canadian consumers find it harder to keep up with their monthly auto loan payments. And that’s saying something when the average new vehicle now costs over $65,000, and used cars aren’t much better.
Here are some practical solutions if you find yourself struggling with car loan payments.
First, Know You’re Not Alone
Vehicle loan delinquencies in Canada have been trending upward since early 2024, with major lending institutions reporting a 15% increase in late payments compared to last year. The average auto loan in Canada now stretches over 72 months with interest rates hovering between 7-9% for those with good credit – and much higher for everyone else.
The payment shock can be real. A $45,000 loan at 8% over 72 months means payments of around $800 per month, which is frankly unattainable for many Canadian households.
Assess Your Situation Honestly
Before taking action, determine exactly how behind you are and how much you can realistically afford. Ask yourself these questions:
- Are you one payment behind or several?
- Is this a temporary cash flow issue or a longer-term affordability problem?
- What percentage of your monthly income goes toward your car payment? (Financial advisors typically recommend keeping it under 15%)
- Do you have equity in your vehicle, or are you underwater on the loan?
Taking a hard look at your finances isn’t fun, but it’s necessary. Spreads work best for tracking your expenses so you can see exactly where your money is going each month. If you’re struggling with this analysis, it might be worth it to speak with a professional who can help you develop a realistic budget and identify areas where you can cut back.
Options If You’re Temporarily Struggling
1. Contact Your Lender Proactively
This is perhaps the most important step and one many people avoid out of embarrassment. Lenders would rather work with you than repossess your vehicle. Repossession is expensive and time-consuming for them, too.
Most major Canadian financial institutions offer hardship programs that might include:
- Payment extensions (pushing a payment to the end of your loan term)
- Temporary payment reductions
- Interest-only payments for a short period
- Loan restructuring
The key is to call before you miss a payment. Explain your situation honestly, ask what options are available, and get an agreement in writing.
2. Refinance Your Auto Loan
If you’ve made consistent payments and your credit score is reasonable, refinancing could lower your monthly payment. This works by either:
- Extending your loan term
- Securing a lower interest rate
- Both of the above
Let’s take a real-world example: A $38,000 loan at 8.5% over 60 months equals a $781 monthly payment. Refinancing the remaining balance to 72 months at 6.5% could drop your payment to around $630 – a significant monthly savings.
Just be aware that extending your loan means you’ll pay more interest over time, but if it helps you keep your vehicle now, the trade-off might be worth it.
3. Look Into Payment Protection Insurance
If you purchased payment protection insurance when buying your vehicle, now’s the time to use it. This coverage can help you make your payments during periods of unemployment or disability.
Check your loan paperwork to see if you have this coverage. If you do, contact your lender about the claims process. You’ll typically need documentation proving job loss or disability.
Options If You’re Facing Longer-Term Affordability Issues
1. Sell and Downsize
If refinancing isn’t enough, selling your vehicle and purchasing something more affordable may be your best option. This strategy works best if you have equity in your current vehicle (it’s worth more than you owe).
The used vehicle market has cooled somewhat from its pandemic highs, but many late-model vehicles still command strong resale values. Crossovers and SUVs with good fuel economy tend to hold value particularly well in the Canadian market.
If you’re underwater on your loan (owing more than the car is worth), you’ll need to cover the difference or roll it into a new loan – though the latter option should be approached with extreme caution as it can create a cycle of negative equity.
2. Transfer Your Lease
If you’re leasing your vehicle, a lease transfer might be an option. Websites connect people who want out of their leases with those looking to take over someone else’s lease, often at attractive terms.
The process typically involves a credit check for the person assuming the lease and a transfer fee of $300-600. Not all leasing companies allow transfers, so check your lease agreement first.
3. Debt Consolidation
For Canadians with multiple debts, including auto loans, consolidating all debts into one lower-interest loan can provide relief. This strategy works best for those with good credit and significant equity in assets.
A home equity line of credit (HELOC) typically offers the lowest interest rates for debt consolidation in Canada, but unsecured personal loans are also an option. By consolidating, you might reduce your overall monthly payments while simplifying your financial situation.
4. Consumer Proposal
For those with severe financial difficulties, a consumer proposal is a legal process available in Canada. It’s a formal arrangement where you offer to pay creditors a percentage of what you owe, extend the time to pay off the debts, or both.
Consumer proposals can include auto loans, though you’ll likely need to return the vehicle unless you can continue making payments or pay for the vehicle outright within your proposal.
This option should be considered only after other alternatives have been exhausted, as it will significantly impact your credit score for 3-5 years.
When Bankruptcy Might Be Necessary
In the most severe financial hardship cases, bankruptcy might be your only option. In a bankruptcy, your assets – potentially including your vehicle – may be seized to pay creditors.
However, depending on your province, you may be able to keep a vehicle up to a certain value (typically $5,000-$6,600). If your vehicle is worth more, you might have the option to “buy back” the excess value from the bankruptcy estate.
Bankruptcy has serious long-term consequences for your credit and financial future, so consider all other options first.
Preventing Future Auto Loan Problems
If you’ve managed to resolve your current situation, here are some tips to avoid future payment problems:
- Follow the 20/4/10 rule: Put 20% down, finance for no more than 4 years, and keep total vehicle expenses under 10% of your income.
- Build an emergency fund: Aim for 3-6 months of expenses, including your car payment.
- Consider gap insurance: If you have minimal equity in your vehicle, gap insurance covers the difference between what you owe and what the car is worth if it’s totaled.
- Buy used and sensible: The biggest depreciation hit happens in the first 2-3 years. Let someone else take that hit. And while they’re less common these days, manual transmission trucks often sell for less than their automatic counterparts while potentially offering better fuel economy and lower maintenance costs over time.
- Get pre-approved financing: This gives you leverage at the dealership and prevents impulse decisions on expensive financing options.
The Bottom Line
I’ve seen too many Canadians who love their vehicles but hate the financial stress they cause. Your vehicle should get you from point A to point B reliably – it shouldn’t drive you to financial ruin.
If you’re struggling, take action sooner rather than later. Most financial problems only worsen with time and inaction. And remember, sometimes the best financial decision is to let go of a vehicle you simply cannot afford, even if it means swallowing your pride.
What about you? Have you faced challenges with car payments? What strategies worked for you? Let me know in the comments below.
