Mounting debt is becoming a real issue in Canada, with the average Canadian consumer carrying $22,125 in non-mortgage debt. That’s a hefty load that can take years to pay down, especially if much of it comes with a high-interest rate. And car loans typically make up a large portion of this debt.
To find out more about car loans in Canada, click here.
The higher the debt load, the higher the chances of being unable to make payments on time and in full each month. Failure to make such payment obligations can result in serious financial consequences. In the case of an auto loan, Canadians can be faced with repossession of the vehicle they’ve been struggling to pay off.
What is Repossession?
When you finance or lease a vehicle, your lender holds certain rights while you’re still under contract with them. Once you’ve fully paid off your loan or the lease term ends, your obligations also end there. But while you still owe money, your lender may exercise certain rights if you violate your contract, including failure to make regular payments.
Is your car loan adding up to more than your car is worth? Look at this.
If you consistently fail to make your auto loan payments, the lender who provided you with financing may repossess your car. This simply means that they have the right to take the vehicle back. They can then turn around and sell the vehicle to someone else in order to recoup their losses.
Even just one missed payment can flag your lender, placing you at risk of repossession. That said, if you have a long track record of making payments on a regular basis with no previous issues, you would likely be less at risk of losing your car compared to someone with a history of defaulting on their payments.
Will Repossession Affect My Credit?
Not only does repossession of your vehicle leave you without a car, it can also make a dent in your credit score. In fact, it can reduce your score from anywhere between 60 to a whopping 240 points.
Repossession can stay on your credit report for as long as seven years. During that time, a note on your credit report specifying your previous repossession will alert any future lenders about your financial past, which could have a negative influence on creditors’ perception of your financial health.
How long does most information stay on your credit report? Find out here.
Your credit score plays a key role in your ability to get a loan, secure a mortgage, and even get an apartment. Considering how important your credit score is, it’s best that you take steps to lessen the blow of repossession on your credit score.
Generally speaking, a person who has a repossession note on their credit report will have a tougher time securing another car loan – or any other type of loan for that matter – because lenders will consider them to be high-risk borrowers. That said, there are ways for you to improve your financial health and eventually be able to get approved for another car loan in the future.
Check out this infographic on commuting to work in Canada.
How to Secure an Auto Loan After Repossession
While repossession can have a negative impact on your credit and your ability to get approved for another car loan, it’s not impossible. There are things you can do today to help you improve the odds of getting an auto loan, even after dealing with repossession in the past.
Pay back any outstanding amount on your auto loan – Your credit has already been damaged, but you can avoid any further deductions on your score by paying off whatever you still owe on your car loan. If the resale value of your vehicle is less than what you still owe on it, you will still be expected to pay down the difference.
This is true even if you are no longer considered to be the rightful owner of the car. In order to boost the chances of securing another auto loan, be sure to make it a point of paying back whatever debt you still owe on your car loan in order to ensure your credit score doesn’t take another hit.
Keep old lines of credit open – Old credit is considered good credit, even if you don’t use it. By closing a line of credit, you will be doing nothing more than reducing your overall available credit. This can hurt your credit score, which you certainly don’t want to happen, especially after repossession.
Don’t open any new credit accounts – Opening new lines of credit increases your debt load, which lenders will look at before deciding whether or not to approve a loan. Instead, you should do your best to pay down whatever existing debt you currently have rather than add to the pile. By paying down your current debt regularly, you’ll show lenders that you are capable of being a responsible borrower and will increase your chances of getting another car loan in the future.
To know what happens to your credit score when you apply for new credit products, look here.
Save up for a large down payment – The more money you’re able to pay upfront for a new vehicle, the better your chances of getting approved for a car loan. A higher down payment means a lower loan amount required, making you less of a risk in the eyes of the lender.
Since you have a repossession on record, you will be perceived by lenders as higher risk, which could prompt them to reject your loan application. But saving up for a large down payment to be put towards an automobile purchase will show lenders that you are financially responsible and capable of handling another car loan.
Buy a less expensive vehicle – You might have your sights set on a certain brand, but if it’s expensive, you might want to reconsider your choice. With a repossession on record, your odds of securing another car loan in the future have already been hampered. You’ll just be making things more difficult for yourself by attempting to get a car loan for an expensive car.
Instead, go for something more affordable. The less expensive the purchase price, the lower the loan amount required. And the less money you have to borrow, the higher the chances that a lender may agree to lend it to you, even with a repossession on record.
Check out this infographic for more information on how to finance a car in Canada.
Take time to repair your credit – If you can go without a car for a little while, you might want to hold off on applying for a car loan so soon after repossession. Repairing your credit after a financial setback like this can take some time. Focus on the steps you need to take to increase your credit score. By doing so, you’ll be in a better and stronger financial position to apply for another car loan, which will increase the odds of approval.
If your credit is still bad, but you need a car loan, read this.
Repossession is certainly not a pleasant experience and it can have serious consequences on your credit score, and your ability to get another car loan. But securing another auto loan in the future doesn’t have to be impossible. By taking the necessary steps needed to repair your credit following repossession, another car loan can easily be in your future.