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Car Loan Debt - How to Reduce it and Get Back on the Road

Reduce car loan debt

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Key Takeaways

You may want to reduce your car debt because you are having trouble making monthly payments or want to pay off the loan early. Options for doing this include refinancing, additional payments, selling vehicles, voluntary repossession or a debt relief solution such as a consumer proposal or bankruptcy.

What is Car Loan Debt?

Car loan debt is a type of debt that is incurred when a person takes out a loan to purchase a new or used vehicle. This type of debt is usually secured against a vehicle, meaning that if the loan is not repaid, the lender has the right to repossess the vehicle.

The recent economic downturn has put millions of people in a difficult financial situation, making it hard to make ends meet. If you are one of the many struggling under the weight of car loan debt, it can feel like you are stuck in a never-ending cycle of debt. But it doesn't have to be that way. With some careful planning and a little hard work, you can get out of car loan debt and get back on the road to financial freedom.

Reasons for Car Loan Defaults

There are many reasons why people can default on their car loans such as the following:

  • Not making regular monthly payments on time

  • Loss of employment

  • Medical expenses

  • Too much overall debt

Whatever the reason, defaulting on a car loan can have serious financial consequences. For example, defaulting on a car loan can lower your credit score and make it more difficult to get future loans. It can also result in a repossession of the vehicle, which can further damage a borrower's credit score.

How to Avoid Defaulting on Car Loans

The best way to avoid defaulting on a car loan is to stay on top of your payments. Make sure to pay your monthly car loan payments on time and in full.

default on car loan

Another way to stay out of default on your car loan is to budget your expenses. Make sure to set aside enough money each month to cover your car loan payment and other bills. If you are struggling to make ends meet, consider cutting back on non-essential expenses. This will free up more money to put toward your car loan payment. If you are currently struggling with debts, you can find more tips here Tips if you are Struggling with Debts.

What is an Upside Down Car Loan?

An "upside down" car loan or also referred to as an "underwater" loan means the market value of the vehicle is less than the current loan amount outstanding.

This can usually be due to two reasons. The first reason is the vehicle is depreciating faster than the loan is being repaid. This is common for new vehicles where the vehicle will depreciate quickly after it is purchased from a dealership, which may be at a faster rate than the loan is being repaid.

Another reason is when a previous car loan debt is rolled into a new car loan. For example, if you trade in your used car to the dealership with a loan still owing on the vehicle, the prior loan will now be included in the new car loan.

For instance, if the prior car loan had $5,000 still owing on it and the new car loan is purchased for $25,000, the total car loan payments will be $30,000. However, the vehicle's market value is only $25,000. Therefore, the car would have a negative equity of $5,000.

How Can I Determine My Vehicle's Current Market Value?

The best way to get an estimate of the car’s current value is to determine its current market value. You can likely find many websites that help you determine a vehicle's value by using criteria such as the model, make, colour, number of kilometres, features and condition of the vehicle. Then compare your vehicle to a similar vehicle found in used car ads and websites. Some of these websites include Kelley Blue Book, AutoTrader and Kijiji.

What Should I Do if I Can't Afford Car Loan Payments?

If you are already in default on your car loan, there are still options available to help you get back on track:

Speak With Your Lender

If you are struggling to make payments on your car loan, negotiating with your lender can be a good option. Before negotiating, make sure to do your research and understand the terms of your loan, as well as its current market value. In some cases, your lender may be willing to work with you to come up with a payment plan that fits your budget. If you can make your monthly payments on time and in full, it will help to rebuild your credit and get you back on track.

Car Loan Refinancing

Another option is to refinance your car loan. This involves taking out a new loan to pay off the existing loan. Refinancing could help to lower your interest rate, making your payments more manageable. However, it is important to note that refinancing a car loan can be risky, as you will may incur more interest throughout the loan and the debt could become "upside-down" as the financing period is extended.

How to Get Out of a Car Loan Debt

Additional Payments

If you want to pay off your car loan debt sooner then you can make extra payments or a lump sum payment to pay off the car loan early. While your car loan may be from 5 to 8 years, most contracts allow you to pay it off sooner. Even if you can only afford to make a small extra payment each month, it will help to reduce your debt and improve your credit score.

Sell Your Car or Transfer to Another Person

Depending on the terms of your car loan agreement you could sell or transfer your vehicle to a family member or a third party. You could post your car on an online marketplace and find a suitable buyer. You would need to tell the purchaser that the vehicle is still financed and must contact the financing company, as you may need to buy out the vehicle before transferring the vehicle's ownership.

sell your car

On the other hand, the purchaser may want to assume the financing agreement, but if the loan balance is more than the selling price, you may have to pay the purchaser the difference to close the sale.

Once the vehicle is transferred, you will have no more car payments, but also no vehicle to travel from place to place.

Debt Relief Solution

If you have trouble with a car loan debt then you may also have trouble repaying other unsecured debts such as credit cards and lines of credit. Your car can be returned as part of the consumer proposal or bankruptcy and then you won't be responsible for further payments. Any shortfall owing to the creditors will be included in the insolvency. This can be a good solution if you don't want your vehicle anymore and also want to get rid of other outstanding debts.

Voluntary Repossession

Voluntary repossession should be your last option if you want to get out of a car loan, as it will significantly damage your credit score. If you are unable to sell or transfer your vehicle then you may choose to surrender your vehicle. This will show up on your credit report as being a repossession, which may make it difficult to qualify for another vehicle or other types of debt in the future.

For this process, you call the loan company and tell them you won't be making any further payments on the loan and for them to arrange to have the vehicle picked up. They will then place the vehicle in an auction to sell it. If there is still a balance owed after they sell the car, they will ask you for payment or send your debt to a collection agency.

If I Return My Car, Can I Get Another One?

Yes, you may still be able to get another vehicle after returning your current one. Once you return your vehicle, you may still need a vehicle to help you get around. Maybe you can manage with public transit and family and friends providing rides, but nothing beats the convenience of having your own vehicle.

Depending on how you returned your vehicle, lenders may not be eager to provide you with another car loan. If your car was repossessed, a potential lender may be unwilling to provide a loan because they may believe you are a higher-risk client as you may not make payments on a future vehicle. However, they could provide loans at a higher interest rate for the additional risk.

One strategy for getting a new car is to return your current vehicle upon filing a consumer proposal or bankruptcy. The old car debt will be included in the insolvency and the lender may be more likely to provide you with a new car loan since you have now reduced your monthly debt payments.


Car loan debt can be a difficult burden, but it doesn't have to be. With the right strategies and resources, you can get out of debt and get back on the road to financial freedom. Start by talking to your lender and exploring your options. You can also look into refinancing or reviewing your budget and cutting back on expenses. With careful planning and hard work, you can get out of the car loan debt and get back on the road to financial freedom.

If you are struggling to manage your car loan debt, don’t hesitate to reach out for help. If you would like to have a free, no-obligation consultation with a Licensed Insolvency Trustee to discuss your financial situation.



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