Can You Include Your Car Loan in a Consumer Proposal?

Posted on November 28, 2023 by Mihir (Mike) Chande, CPA, CA, CIRP, Licensed Insolvency Trustee

A consumer proposal might be a lifeline for those overwhelmed by debt during hard financial times. A binding agreement between a debtor and their creditors enables debt repayment at a more reasonable pace. However, many people are unsure how a consumer proposal may affect their current auto loan or their ability to get a new one. 

In this blog, we’ll discuss the impact of including auto loans in a consumer proposal and solutions accessible to debtors having trouble making their car loan payments.

What debts can be included in a consumer proposal?

  • Unsecured Personal Loans: The proposal may cover any personal loans not backed by collateral.
  • Credit Cards: Consumer proposals can assist in eliminating unpaid credit card debt and easing the burden of high-interest rates.
  • Lines of Credit: If you have unsecured borrowing in your line of credit, you may include it in the proposal.
  • Payday loans and other high-interest loans: A consumer proposal may be used to handle debts stemming from payday loans and other high-interest rapid loans.
  • Student Loans: Student loans may be considered if you have been out of school for seven or more years.
  • Debts related to income taxes: Consumer proposals can manage and pay off debts related to income taxes. 
  • Maximum debt amount: Additionally, Total debts must not exceed $250,000 (excluding the principal residence mortgage) for a consumer proposal to qualify.

What happens to a car loan in a consumer proposal? 

You can’t include a secured debt like a car loan or lease in a consumer proposal. Despite this, it’s possible you won’t lose your car as long as you keep up with your monthly payments. 

When you obtain a secured loan, such as an auto loan, the lender registers a security interest in the car you purchased with the loan for. 

Suppose you don’t make the necessary loan payments following the terms that were agreed upon. In that case, the lender has the legal authority to seize ownership of the item, a process known as repossession. Therefore, a consumer proposal filing will not affect your car loan if you make your payments on time.

What if you cannot afford your monthly car loan payments? 

If you cannot afford payments on the car loan, you may want to consider a voluntary repossession. This process entails asking your lender about giving the car back voluntarily. Negative equity is the term used to describe when a person owes more on their auto loans than the actual value of their cars. 

Fortunately, in these situations, a consumer proposal can be a lifesaver. When you submit a consumer proposal, you can walk away from a vehicle loan deal and include any remaining balance as an unsecured debt. 

Can you refinance a car loan while in a consumer proposal? 

If your car loan payments are too high, you can consider refinancing. Refinancing does not occur directly during a consumer proposal. Instead, it requires your vehicle loan lender’s approval. 

If your lender agrees to a refinance, they can increase the interest rate and lengthen the loan time. While lower monthly payments may seem appealing, a longer loan term can lead to increased interest costs and an extended debt period.

Your financial situation may still be in jeopardy if you owe too much on your car after paying off other obligations through the proposal. Consider voluntary repossession before filing if you require a car during the consumer proposal. Also, look for a vehicle that is favourably priced with a shorter loan term, ideally between 3 and 4 years.

Can you get a new car loan after filing a consumer proposal? 

Suppose you willingly gave your vehicle to your lender and filed a consumer proposal. In that case, you may be wondering if you can still get accepted for a new car loan while your proposal is still active. You can! However, a consumer proposal may temporarily lower your credit score. As a result, lenders may be more hesitant to grant you credit.

You may face stricter loan qualification standards and higher interest rates to obtain a new auto loan. However, if you can find a cosigner, you may qualify for a car loan with a potential lower interest rate. 

It is critical to actively restore your credit to acquire the best car loan rates and terms. By keeping a consistent income and a manageable debt-to-income ratio, you can progressively rebuild your creditworthiness by displaying trustworthy financial practices. 

If you urgently require vehicle financing, there is an alternative. Vehicle financing companies have less severe qualification standards than traditional lenders. They may be more ready to offer you a fair interest rate, making purchasing the vehicle you need easier.

What can you do if you can’t keep up with your car loan payments?

There are options available to help you get out from under the burden of your auto loan payments, including the following: 

Refinance or negotiate loan terms

Talk to your lender about refinancing your loan at a better rate or working out a new repayment schedule. However, if your credit score has worsened since you first got the loan, getting a reduced rate or extending the loan may be difficult.

Transfer your loan to someone else

You can transfer your loan to another person if they are ready to assume responsibility for the debt repayment. The new borrower usually needs stellar credit and a steady income before the lender will agree to this arrangement.

Sell or trade in your vehicle

If making auto loan payments is causing you financial hardship, consider selling or trading in your vehicle. The money from the car can be put toward paying off the loan. You can also utilize the funds you receive from trading in your vehicle toward purchasing a new, more affordable car.

The Benefits of a Car Loan Rebuilding Credit during a Consumer Proposal

Getting a car loan during a consumer proposal can help you rebuild your credit. You can prove to lenders that you can handle additional credit when you have a secured auto loan and consistently make payments. Your credit score will increase as a result of your timely payments.

Budgeting, a strong payment history, and living within one’s means are all encouraged by having loans with fixed payment deadlines. 

When making a consumer proposal, weighing the pros and cons of applying for new credit is important. Talk to your Licensed Insolvency Trustee for the advice and details you need to make the right choice.

Exploring Debt Consolidation Car Loans Buying a Car with Bad Credit 

With the assistance of a debt relief program and a debt consolidation auto loan, even those with poor credit can purchase a vehicle. Bad credit can be fixed if you view this time as temporary. Consider your needs and your budget before making a final decision on a car.

A good chance to rebuild credit at reasonable rates can be found at several major banks and auto lenders. They may have a loyalty program that offers discounted rates to customers with a spotless payment history. If you make your car loan payments on time, you may be able to trade up for a better model as your credit improves.

Qualifying for Car Financing during a Consumer Proposal 

It might be challenging to get approved for auto financing during a consumer proposal, but you can take the following steps to improve your chances:

  1. Understand the consumer proposal process: Before applying for additional credit or making any changes to your current consumer proposal, ensure to understand the terms and conditions of a consumer proposal. You can talk to a Licensed Insolvency Trustee if you have any questions.
  2. Rebuild Credit: Repair your credit by paying your bills on time and in full right away. Making on-time payments demonstrates to potential lenders that you can be trusted with money.
  3. Savings on down payment: Start putting money aside for a down payment. A greater down payment increases your ability to secure auto financing. It demonstrates reliability and lessens the lender’s risk, increasing your attractiveness as a borrower.
  4. Research lenders: Find a lender who will provide you with a car loan despite your credit history or financial difficulties. They may provide more accommodating terms without substantially raising interest rates.
  5. Gather documentation: Get your financial records, your evidence of residency, and the specifics of your consumer proposal in order. Tell the truth about your financial situation and show that you’ve improved to stay out of debt.

How long after filing a consumer proposal can I get a car? 

The time it takes to buy a car is determined, after you have finished filling out your consumer proposal, by your credit score and your current financial situation. It is crucial to rebuild your credit to be able to qualify for low-interest auto loans. You will have a better chance of being approved for a loan and of qualifying for a reduced rate if you save up money for a down payment first, lowering monthly payments.

Though the interest rate may be higher, specific vehicle loan lenders specialize in consumer proposal auto loans. Reputable lenders can manage your loans and cut the rate over time. Ask your Licensed Insolvency Trustee about local financing options if you need a new auto loan.

The experienced Licensed Insolvency Trustees of Chande Debt Solutions are focused on personal insolvency services, such as filling out a consumer proposal.
Call us today at 416-366-3328 or fill out our convenient online form to learn how we can help you recover financially.

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Mihir Chande
Mihir (Mike) Chande, CPA, CA, CIRP, Licensed Insolvency Trustee Mike, a Chartered Accountant, began his insolvency career in the Corporate Insolvency and Restructuring group at one of Canada’s largest insolvency firms. After gaining extensive experience, he founded Chande Debt Solutions to offer personalized and empathetic debt relief services to clients seeking an alternative to traditional solutions.

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