Stats Canada proves that the average Canadian has approximately $1.68 of credit debt for every dollar of income.
High debt to income ratio could influence how successful Canadians are at paying back their creditors. The penalties for not being able to make payments on your loan can range from high interest charges to collections accounts and at worst, bankruptcy. When it comes to your car loan, if you can’t afford to pay it, you’re not allowed to keep it. In Canada, there are over 33 million motor vehicle registrations. However, not all of them are being driven by people who can afford to pay their auto loan.
Inability to pay your auto loan could lead to repossession of the vehicle.
What Is Repossession?
Repossession is when your vehicle is seized due to defaulted payments. Repossession is a non-negotiable act that entails your car being towed by a “repo person” and taken back to the lender. The lender will usually auction the vehicle off and apply the money to the debtor’s loan. Usually, it only takes one default payment for a person to be at risk of repossession. Although, a person who has a history of making regular payments on their auto loan is at less of a risk of having their car repossessed compared to someone who has defaulted more than once.
In Canada, there are two kinds of repossession:
Voluntary Repossession: When someone can’t make consistent car payments and willingly brings their vehicle back to the lender because they recognize that they can’t afford the auto loan.
Involuntary Repossession: When a person has defaulted on several loan payments and denies bringing the vehicle back, the lender can legally reclaim the vehicle without the debtor’s consent.
The speed in which involuntary repossession occurs in Canada can sometimes depend on where the debtor lives – a person who lives in farther suburbs, for example, might not have their car repossessed as quickly in comparison to someone who lives in a city. Although lenders are strict and take the act of repossession seriously, it is advised that a person speak with the lender if they can’t make a payment to see if a financial agreement can be settled – the lender might give someone who is honest about their debt situation an extra 30 days to pay back the amount owed.
If a lender grants a debtor more time to pay back a loan, it’s the consumers job to do everything in their power to make the owed payment. This could mean cutting back on weekly budgets, signing up for extra weekend jobs or putting any savings towards the owed payment. Any payment, even if it’s small, is better than nothing at all.
My Car Was Repossessed, Now What?
Unfortunately, car repossession takes place more frequently than we might think. Fortunately, if you’ve experienced car repossession, you’re not doomed for financial failure, and you’re not alone. A person who has experienced repossession needs to first see how their credit was impacted. Repossession marks on a credit report could drop a score 60 to 240 points. A larger drop is made to individuals with good credit scores as it reflects a new risk level to creditors.
Repossession could stay on a person’s credit report for up to seven years. However, this doesn’t mean that the actual score will remain low the whole time. Based off credit history, lenders will consider the risk factors of an applicant, and through the process of a credit review, they’ll discern if you can qualify for a loan or not. Often, a person with repossession on their credit report will have a more difficult time obtaining a car loan because they are considered a high-risk to lenders. Luckily, more lenders today are willing to take chances on borrowers with less than perfect credit through subprime financing.
Should you ever face a vehicle repossession, follow these five steps to ensure that your credit doesn’t get further damaged and to increase your chances of getting a low interest auto loan in the future.
Avoid closing lines of credit (and avoid opening new ones): Instead of closing credit cards or other lines of credit, try your best to reduce the debt owed by making regular payments on time. Closing a line of credit could reduce your available credit, which in turn can damage your score, which is the last thing you want on your credit report after dealing with repossession. Additionally, avoid opening new lines of credit. Instead, focus on paying down the debt that you owe. Demonstrating exceptional repayment habits will increase your chances of getting an auto loan with fair interest rates.
Pay off outstanding debt on your car loan: If the sale value of your repossessed car is less than what you owe, lenders expect you to pay the difference, even if your car was taken away. Prioritize this debt to protect your credit from getting damaged even more.
Begin saving for a down payment: Getting approved for an auto loan after having a vehicle repossessed isn’t easy because lenders see a person with repossession as a risk. However, having a history of repossession on your credit report doesn’t mean that you can never own a car again. Putting a down payment on your next car loan is a great way to increase your odds of getting approved by lenders as a down payment demonstrates that you’re capable of saving money, which reduces the risk for a lender. Experts suggest putting a down payment of 20 per cent if you want to get the best interest rates. Although this might take time, it’s worth it – time saving for that down payment is time you can be using to help rebuild your credit.
Consider affordability: When you’re ready to apply for a new auto loan after repossession, think affordability. The more affordable the vehicle is, the easier it will be to pay off. An affordable vehicle means less money borrowed, which means better chances of getting approved by lenders.
Be prepared: Coming out of a repossession is difficult for a lot of reasons. Lenders view you as a risk and your debt could feel heavier than ever. But focusing on developing a responsible payment history is what will get you to where you need to be credit-wise, thus proving to lenders that you’re capable and responsible enough to borrow money.