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What happens when you default on a car loan

And steps you can take to avoid repossession.

Updated

Fact checked

Falling behind on your car loan payments not only damages your credit score, but could also cause you to lose your car. And if you had a cosigner on your loan, they’ll be hit with the same repercussions. But there are steps you can take to avoid repossession when you’re facing default.

How do I know if my car loan is in default?

Your car loan could be considered in default after just 1 missed payment, though it varies by providers. Typically, most lenders won’t take steps to repossess your car until you’re 90 days late on a repayment. Your loan agreement should detail how many days you have to miss before your loan goes into default.

4 consequences of defaulting on your car loan

Here’s what could happen if you fail to pay back your car loan:

  • Your credit score will take a hit.

    Just being late on your car loan repayment will likely lower your credit score. But going into default will add another negative mark to your credit report. If your car is repossessed, your account is sent to collections or your lender sues you, your credit score could take an even greater hit — dropping as much as 100 points in some cases.

  • Your car may be repossessed and sold.

    Your car can be repossessed once your loan goes into default. However, your lender is required to notify you beforehand and give you the chance to catch up on payments first. If you’re unable to get out of default, your lender will likely seize your car and sell it at a fair market price.

  • You may still owe your lender after your car is repossessed.

    If your lender sold your car for less than your outstanding loan balance, you’ll be on the hook to repay the difference — called the deficiency balance. You’ll also be responsible for paying any costs associated with repossessing your car.

  • Your remaining debt could be sent to collections.

    Fail to repay the deficiency balance? Your lender might sell your debt to a third-party collection agency, which tries to get you to pay up. If you don’t, there’s a chance the agency could sue you for repayment.

What is the statute of limitations on car loans?

The statute of limitations on car loans varies by province, ranging anywhere from 2 to 10 years. It applies only to unsecured debt, for example, if you got a unsecured personal loan to pay for your car. Once the statute of limitations on your loan passes, your lender no longer has the right to sue you for repayment. However, be aware that most car loans are considered a secured form of debt so the statute of limitations would not apply.

Will filing for bankruptcy discharge my car loan?

Probably not. In most cases, you’ll either need to surrender your car to your lender or continue to pay off your car loan according to a modified repayment plan.

How will defaulting on my car loan affect my cosigner?

If a family member or friend cosigned your car loan, they’re legally responsible for paying back your loan should you default. If they fail to do so, your cosigner will be hit with the same consequence you’re facing, including a lower credit score and the risk of being sued over an unpaid deficiency balance.

I defaulted on my car loan. What can I do?

If you received a notice from your lender that your car loan is in default, you still have a few options to prevent your car from being repossessed. These include:

  • Contact your lender to set up a new payment plan. Your lender may be willing to adjust your payment plan to make it more manageable — especially if you have proof of economic hardship. If you’re able to come to an agreement on a revised plan, make sure you get it in writing.
  • Refinance your car loan with another lender. If your credit score hasn’t taken a huge hit, you may be able to refinance your car loan with another lender. Even if you can’t qualify for a lower rate, extending the term can make for smaller monthly payments.
  • Sell your car and pay off your loan in full. This is ideal if you owe less than your car is worth — you may even be able to make a profit from the sale. However, this may not be the best choice if your car loan is upside down. Here’s what you should know before selling your car if you still owe on it.
  • Surrender your car to your lender. If repossession is on the horizon and you’ve exhausted all other options, you can voluntarily turn your car over to your lender. While this will still count as a repossession on your credit report, you won’t be responsible for paying repossession fees.

Compare car loan refinancing options

Name Product Min. Loan Amount Interest Rate Loan Term Min. Credit Score Requirements
Car Loans Canada
$7,500
3.99% to 29.95%
12-84 months
300
3+ months employed, min. income of $2,000/month
Search thousands of vehicles online, including $0 down options, from dealers across the country and get matched with affordable financing options. Auto loans are also available to those with bad credit, consumer proposals and bankruptcies to help rebuild credit.
CarsFast Car Loans
$500
4.90% to 29.90%
12 months - 8 years
300
Gross income of $1,800/month, 3+ months employed
Browse thousands of vehicles from dealers across Canada and get matched with financing that meets your needs. Apply online to purchase a new or used vehicle and get the vehicle delivered to your door.
Loans Canada Car Loans
$500
0% to 29.99%
3-96 months
300
Employed for at least 3 months, min. income of $1,800/month
Get access to financing from multiple lenders across Canada through a single application with Loans Canada. Bad credit, CERB and EI borrowers are considered.
Carloans411 Car Loans
$500
1.90% to 19.99%
Up to 72 months
300
Employed for 3+ months, min. income of $1,600/month
Get connected with suitable lenders through CarLoans411. Finance your next car, van or truck with loans available in amounts from $500 to $50,000. Check eligibility for this loan through LoanConnect.
LoanConnect Car Loans
$500
10.00% to 46.96%
6-60 months
550
No min. income requirement
Get access to 25+ lenders through LoanConnect's brokerage. Receive pre-approval in as fast as 60 seconds and get your funds in as little as 24 hours.
Auto Arriba Car Loans
$3,500
8.99% to 29.50%
6-84 months
N/A
Currently employed for 3+ months
Auto Arriba offers car loans starting at $3,500 up to $100,000, with as little as a 30 minute loan turnaround time. On a limited number of approved loans, Auto Arriba is currently offering a rebate of the amount of your first scheduled payment 30 days after it has been processed up to a maximum of $500.
Fairstone Secured Personal Loan
$5,000
19.99% to 23.99%
3-10 years
560
Have an established credit history and own your home
Fairstone offers secured personal loans up to $35,000.
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Compare up to 4 providers

Bottom line

At the very least, defaulting on your car loan will cause your credit score to take a hit. You could also end up losing your car — or worse, getting sued. If you’re worried about defaulting or already have, there are steps you can take to get your finances back on track.

You can learn more with our guide to improving your credit score and establishing better credit.

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