What Happens When Car Loan Debt is Too Much to Handle?

The Implications of Unmanageable Car Loan Debt

In the modern world, owning a car is not a luxury but a necessity. However, the hefty price tag that comes along with it often leads individuals to embrace car loan debt. As people extend their loan terms to seven or eight years, it’s worth considering the implications of such financial decisions. This article explores what happens when car loan debt becomes too much to handle.

A Major Financial Stressor

Debt from car loans is among the major financial stressors plaguing Canadians. After housing, transportation stands as the second-largest household expenditure in the country. Despite the financial burden, many still take on car loan debt to meet their transportation needs. However, habits like opting for longer-term loans, buying new, and rolling old car loans into new ones can create a downward spiral, putting immense pressure on the household budget.

What to Do When Car Loan Debt Becomes Unmanageable

If you find yourself grappling with car loan debt that you can no longer manage, it’s crucial to understand your options. Whether you decide to maintain your vehicle or let it go, consulting with a debt professional can help you make the best decision for your personal situation.

Understanding Car Loan Debt: 7 Key Points

If You Want to Retain the Vehicle

1. Engage your lender in a conversation about your car loan

If you foresee trouble making a payment on your car loan, we advise you to contact your lender in advance and try to arrange a better payment plan. Your lender would always prefer to work with you rather than resort to legal action. Reaching out to your lender early can prevent the involuntary repossession of your vehicle due to missing multiple payments.

2. Refinancing your car loan debt is possible, but it can be complex

Refinancing your car loan debt can offer some relief. However, it usually extends the length of your loan and ends up costing more in the long run. The danger of refinancing lies in the possibility of having an upside-down car loan or carrying negative equity where the vehicle’s value depreciates faster than you can pay off the debt.

3. Assess your debt relief options

If your car loan debt is overwhelming, other expenses are likely adding to the burden. How are you managing your credit card bills, line of credit repayment, and any other unsecured debts? The right debt relief can free up cash flow, enabling you to stay on track with your mortgage and car loan.

4. Be cautious of longer-term car loans

Overspending on vehicles is a vulnerability for many Canadians. Longer-term car loans that spread payments over seven or eight years can push you into buying a car that exceeds your needs.

If You Wish to Part with Your Vehicle

5. Sell the vehicle or trade it in

While selling a vehicle that you still owe money on is more complicated, it remains an option. The first step is to determine the payout amount from your financial institution. To sell the vehicle, you will need to pay off the loan first.

6. Opt for voluntary repossession

If you’re unable to make payments, you can return the vehicle to your financial institution. This is known as voluntary repossession or voluntary surrender.

7. Consider a debt relief solution

Debt relief solutions like consumer proposals or bankruptcy can free you from unsecured debt, like credit cards and lines of credit.


38% of indebted Canadians have auto loan debt. If you’re worried about your debt, it’s important to understand the debt solutions available to you.

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