Consequences of Defaulting on a Car Loan

Consequences of Defaulting on a Car Loan

December 15, 2023

Getting a car usually involves spending a considerable amount of money, and many people turn to car loans to make the purchase easier. However, financial circumstances can shift, making it difficult to keep up with regular payments. 

Given the present economic conditions in Canada, there is an increase in defaults and insolvencies, indicating that households are facing heightened struggles with debt. And failing to meet obligations on a car loan can result in serious consequences. 


Difference between default and delinquent

When you miss a payment, you've got a bit of time before it's a bigger issue called default.

Right after you miss the payment, your loan becomes delinquent. It’s not great because the lender might charge you extra—a late fee that could be a fixed amount or a percentage of what you owe.

If you manage to make the payment a few days late, you can sort things out and get back on track.

But if you go 30 days overdue (or 90 days for certain loans), that's when it becomes a default.

Both late payments and defaults are reported by lenders, and neither is good for your money or credit. 


Consequences of defaulting on your car loan


1. Vehicle repossession

The first major consequence is the lender taking back the vehicle. It can be really inconvenient and awkward because sometimes they don’t even let you know beforehand. This could leave you without a ride when you least expect it.


2. Post-repossession financial obligations

You might still owe money to your lender even after they take back your car. If they sold the car for less than what you still owed, you're responsible for the remaining amount, known as the deficiency balance. On top of that, you'll have to cover the expenses related to repossessing the car.


3. Legal consequences

Legal troubles might arise if you don’t pay the remaining balance. The lender could take you to court, leading to wage garnishment or a court order against you. This could make your financial situation even more complex.


4. Negatively impacts your credit score

Your credit score is going to suffer. Simply being tardy on your car loan payment can bring it down, and defaulting will make it even worse with an extra black mark on your credit report. If things escalate to repossession, collection actions, or a lawsuit from your lender, your credit score might take an even bigger hit. Missed payments and defaults get reported to credit bureaus, seriously impacting your credit score and making it tougher to get good loan terms, credit cards, or even housing down the line.


5. Impact on auto insurance rates

Your credit score can impact how much you pay for insurance. If your credit score takes a big hit because of a default, you might end up paying more for auto insurance when you get another vehicle.


What should you do if you default on your car loan?


  • Talk to your lender: Reach out to discuss a new payment plan. If you can prove financial hardship, they might adjust the plan to help. Once you agree on a new arrangement, make sure to get it in writing.
  • Refinance your loan: If your credit isn't severely affected, consider refinancing with another lender. Even if you can't get a better rate, extending the loan term could lower your monthly payments.
  • Sell your car: If you owe less than what your car is worth, selling it might help clear the loan. However, if your loan amount is more than what your car's worth, this might not be the best option.
  • Return the car: As a last resort, give the car back to your lender voluntarily. Though it still counts as repossession on your credit report, you might avoid repossession fees.


Read: What Does Voluntary Surrender of a Car Mean? 


In summary, defaulting on a car loan brings serious consequences, including repossession, financial obligations, legal troubles, and a negative impact on credit. Despite these challenges, proactive steps like communicating with your lender, exploring refinancing, or considering alternative solutions can help navigate the situation. While defaulting poses difficulties, seeking guidance and taking decisive action can be crucial in overcoming financial setbacks and working towards a more stable future.