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Vehicle Debt: Car Loan Payments and Car Financing Costs

Most people in Canada need some form of transportation. Many rely on public transit, taxis, or rideshare companies—but car ownership is still widespread.

Of course, most car buyers often use a car loan to finance their purchases. But that presents certain risks, especially if you need a car to hold a job. And, buyers are experiencing a financial storm with high vehicle prices, high interest rates, and extended loan periods. These conditions can take out a sizable chunk of your budget and easily push some drivers into debt.

The good news is there are ways to bring your costs under control and even get rid of your vehicle debt. Let’s delve into all you need to know about car loan payments.

The High Cost of Transportation

Transportation is a sizable expense. Canadians spend about 15% of their budget on transportation costs. It’s the third largest household expense after housing and food. And the average monthly amount we spend on transportation is approximately $1,300 (that includes loan payments, gas, and car insurance).

In short, a car requires some significant investment. And costs are rising with increased demand, less inventory, supply chain issues, and higher interest rates. Both new and used vehicles have seen significant price increases, with used car payments 40% higher than before the pandemic.

Higher prices and interest rates have known consequences: they can lead to larger loans with bigger payments. But you still have significant control over your car financing. You may not be able to influence interest rates or car prices, but there are proactive steps you can take to minimise the impact on your budget.

How to Keep Car Loan Payments Low

If you are in the market for a vehicle, here are some strategies to help keep your car payments manageable.

Determine if the car is a need or a want

A vehicle loan will increase your debt load. So compare and contrast the financial strain of a new car. If your current vehicle runs well and meets your needs it could be a good idea to delay. You gain more time to save money and borrow less later on. You’ll also be able to thoroughly research the makes and models of cars you want and wait for a good deal once you see one.

Find a good mechanic

A good mechanic can tell you the worth of your car and the length of its lifespan. That can influence whether you go in for a new vehicle or wait for a more opportune moment. A mechanic will also inspect a used for sale vehicle before you buy it to let you know if there are any problems. That can help you avoid payments on repairs. Mechanics are very familiar with the various car brands and can give you advice on which vehicles are reliable and have low maintenance costs.

Get a pre-approval

If you plan to buy a vehicle, get a pre-approval from a lender. This will simplify the purchase process and keep you under budget (car loan calculators are available as well). Note that a pre-approval will often give you the maximum amount you can afford. You don’t need to spend that much! A cheaper car with fewer options might work for you and your budget.

Negotiate your terms and conditions

Negotiate with your lender to see if you can get a better rate on the loan. Shop around and ask for competing offers. Dealerships sometimes have promotions with reduced financing rates as well.

In September 2023, Canada’s average new car price was $67,817. Given the loan size, a lower rate can have a significant impact on your payment levels. You can also ask for a long-term auto loan to lower your payments. A term agreement of 72 or 84 months will make your payments more affordable (but your interest costs will be higher).

How to Deal With Unaffordable Car Payments

If your circumstances change, you may be in a position where you can’t afford your payments. A job loss, illness, marital breakdown, or emergency expenses can leave you unable to cover all your living costs.

If you can’t make your car payments, your lender can take action to get their money back. Most car loans use the vehicle as security. So if you fail to pay, your lender can send your loan to collections and repossess the car.

When a lender repossesses your vehicle, they seize it and sell it to get their money back. You will be left without transportation, and a repossession will negatively affect your credit rating.

If you are in financial trouble, don’t ignore the problem. Instead, take these action steps:

  • Talk to your lender: Your lender may be able to defer a payment, renegotiate the loan, or offer an alternative solution.
  • Sell or trade your car: Regain the car’s value by selling. You’ll need detailed information on how much you owe and how much you can get if you sell or trade the vehicle. If you owe more than the car is worth, you’ll still have to pay the extra amount.
  • Contact a Licensed Insolvency Trustee (LIT): LITs are federally regulated professionals who provide services to individuals and businesses with debt problems. They offer government-approved debt relief programs to help you eliminate your debt. Two things that can work for you if your payments are out of control are a Consumer Proposal and filing for Bankruptcy.
  • File a Consumer Proposal: A Consumer Proposal can reduce your unsecured debt by up to 80%, give you one monthly payment, and allow you to keep your assets. If you are having financial problems because of other debts, a Consumer Proposal can help. It can combine your unsecured debt into an affordable monthly payment, allowing you to keep your car and providing a path to financial relief.
  • File for Bankruptcy: Filing for Bankruptcy, while often seen as a last resort, can be a fresh start. If you’re insolvent and can’t pay all your debts, Bankruptcy can provide a light at the end of the tunnel in your financial journey. Eliminate your unsecured debt for good and pave the way for a brighter financial future.

Your LIT may have to liquidate some of your assets to pay your creditors if you file for Bankruptcy. However, each province has vehicle asset exemptions, which allows you to keep a vehicle with a maximum amount. In Ontario, you can keep a car with a maximum value of $7,117.

Where to Get Help With Your Debt

If you struggle with debt and sky-high car payments, we can help. We understand that circumstances change, and we offer solutions to get you out of debt so you can get back on the road to financial stability. Call us at 519-310-5646 or visit our website to book a free consultation with one of your Licensed Insolvency Trustees. We’ll work with you to eliminate your card debt so you can have a fresh start.

John Adamson, Licensed Insolvency Trustee Ontario

John Adamson, CPA, CMA

John is a Licensed Insolvency Trustee (1994), a Chartered Insolvency and Restructuring Professional (CIRP – 1994), and a Chartered Professional Accountant with a Certified Management Accounting designation (CPA, CMA – 1992). His experience includes more than 25 years of helping individuals, small businesses, their owners and even lenders, find solutions to their debt problems.

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