For most Canadians, having reliable means of transportation is essential. Unless working from home is an option or you live in an area where public transportation is very convenient, it would be crucial to own a vehicle. However, with the financial impacts of the COVID-19 pandemic still being felt by many, keeping up with car payments may have become increasingly difficult.
If you end up falling behind on payments for your vehicle, it will cause your credit rating to take a direct hit. Delinquent items have a high impact on your credit score and credit bureaus in Canada, TransUnion and Equifax, keep a record of certain items for as long as seven years. This will affect any future attempts to apply for credit as lenders may view your borrowing history as high risk and either decline your application or offer credit to you at a much higher interest rate.
If you foresee that upcoming auto payments may be an issue financially, you should evaluate the different options that you have. Let’s take a look at what those are below.
Speak To Your Lender First (And As Soon As Possible)
You can start by speaking with your credit provider to discuss the alternatives available to you. Most lenders don’t want to see you default on your loan and may be willing to work with you to provide financial relief. This is especially true at the moment as many lenders are providing financial relief for the COVID-19 crisis.
In some cases, lenders will offer the option to skip or defer payment so that the amount due is pushed back until the end of the loan. This allows the borrower to navigate through short term financial hardship while not having to worry about the deferred amount being lumped with the next month’s payment. However, every credit provider has a different policy in regards to how often you can request a payment deferral and in some cases, you may still be required to pay the interest on the monthly payments.
Another option is to request your lender to reduce the payment amount. These requests are typically handled on a case-by-case basis where the creditor may be willing to accept a reduced amount for a certain period of time to retain their relationship with you and avoid drastic action.
Refinance Your Way To A Payment Deferral
Refinancing your car loan means that you are taking out a new loan to pay off the existing balance of the current loan. This is a feasible way of spreading out the costs of repayment as your new loan would be for a lower amount than the original loan. This is because you’ve already paid a portion of the original loan, now you’re just refinancing the remaining balance to take advantage of more affordable monthly payments. You may also get a new payment due date after refinancing that is more suitable for your short-term cash flow needs. When refinancing your car loan, your vehicle will likely be used as collateral.
If there is very little or negative equity in your car loan, it may be best to avoid refinancing options. Equity in a car refers to the difference between the resale value of the vehicle and the amount still owing on it. If the resale value of the vehicle is less than the amount owing, this is referred to as having negative equity in the car asset. Other scenarios where refinancing an auto loan is ill-advised are when the cost or fees of refinancing are exorbitantly high, or if the loan is almost paid off.
Miss The Payment
If the lender won’t provide any leniency toward your monthly payments, refinancing is not an option, and you are about to miss your first payment, you may have no other choice but to miss the payment. Your credit score will be affected, but in most cases, lenders won’t take drastic action immediately.
That being said, you will be considered in default on your loan after 30 days. Lenders will typically wait three or four months before moving to repossess your vehicle or sending your account into collections. Provided that you resume paying your monthly payments as soon as possible after one or two missed payments, you will likely be able to continue with the finance or lease arrangement for your car.
This option should be used as a last resort. Missing payments does immense damage to your credit score because payment history contributes the most to credit score calculations.
For those that are having difficulties keeping up with monthly payments and foresee it to be more than a short-term issue, they can consider the option of selling their car. Provided that there is positive equity on the car, in other words the resale value of the car is more than the amount owing, you could use the proceeds of the sale to pay off the existing loan and search for a more affordable vehicle with lower monthly payments.
If you have negative equity on the loan or if selling the vehicle would not be feasible, make sure to communicate with your lender that you are no longer able to afford the payments and need to return the car. This process is referred to as a voluntary surrender and the lender will attempt to sell the returned vehicle, but you are still liable for payments during this time. Should the resale amount be lower than the amount owed, you will be required to pay the difference.
If you do not contact your lender to surrender your car and continue to miss payments, the lender will assign a repossession agency to collect the vehicle. This process is known as involuntary repossession or involuntary surrender. Repossession agents may collect the vehicle at any time, causing stress and anxiety during inconvenient circumstances. Additionally, any fees that the repo agency charges are added to your existing loan balance.
Alternatively, your loan might go into collections. Having an overdue account is stressful because you’ll have to endure collection calls, written notices and other harassment from individuals trying to collect. If you’re currently in this position, you may need to seek professional help to determine a solution.
Help Is Available
Dealing with debt can be extremely tough but you don’t have to go through it alone. If you are facing financial hardship and have difficulty making your payments, you can speak with a credit counsellor to evaluate the different options available to you. A credit counsellor can help you manage your debt and work with creditors to set up affordable payment plans.
As always, do your due diligence when evaluating the different options available to you. Be sure to verify the identity of anyone contacting you claiming to be your lender or a representative of a credit agency as there have been numerous cases of loan scams surrounding the financial effect COVID-19 has had on many Canadians.