How does car repossession work and how can I avoid it?

For many, car loans are a significant part of household debt. If you don’t own a home, your vehicle may be your most valuable asset. Worrying if you’re going to lose your vehicle—and therefore your primary method of transportation—is a stressful situation to be in. We've put together answers to the most common questions about car repossession in Canada to help you understand what to expect and what you can do to avoid it.

What happens if I fall behind on my car loan?

Missing just one payment can put you at risk of car repossession, depending on your lender. If you have a good payment history, you're less likely to face repossession than someone who’s missed multiple payments. Repossession laws vary across provinces and territories, but lenders usually notify you of missed payments. Even with a good history, missing multiple payments in a row can lead to repossession. It’s important to always read the fine print in your agreement.

Loan deferment—moving a missed payment to the end of the loan term—is a common solution for a single missed payment. Lenders are generally more understanding if you communicate your situation ahead of time and propose a solution. If you consistently struggle to make your car payments, consider re-evaluating your budget or selling your leased car for a used one without a lease. Filing a consumer proposal or bankruptcy can also free up money in your budget to pay your car loan.

What is car repossession?

When you finance a vehicle from a dealership, you don’t actually own that vehicle until you pay off the loan. A car loan is a secured loan, meaning it’s backed by an asset, and the lender has a legal right to the car as collateral until the loan is paid off in full. Car repossession happens when your financed car is taken because of missed payments. The lender will attempt to sell the car to cover the loan. If the sale doesn’t cover the full amount of your outstanding debt to the lender, you may still need to pay the difference, depending on your province.

If you lease your vehicle from a dealership, it can also be repossessed if you miss payments. When you lease a car, you're essentially renting your vehicle from the dealer, usually for a set term. Just like renting an apartment or home, if you fail to meet the agreed upon arrangement with the lender—the dealer—they can end the agreement and take back possession. 

What are the different types of car repossession?

There are two types of car repossession: voluntary and involuntary. Regardless of which type of possession happens, the end result is still the same.

Voluntary repossession is when you choose to return your vehicle to the lender. With this type of repossession, you inform your lender that you’re unable to make your payments and arrange a time to drop off the vehicle. If the lender needs to spend any money during the process of repossession–such as towing or storage fees–they can pass these costs along to you. Opting for voluntary repossession does mean losing your vehicle, but it can be a less stressful experience than the alternative.

Involuntary repossession is when the lender repossesses your car without your consent. They can do this at any time once you’ve failed to uphold your responsibilities of the loan or lease agreement. If you want to retrieve your vehicle, you must pay any additional costs associated with the repossession.

In either case, you’ll end up without a vehicle, but choosing voluntary repossession allows you to maintain some control and can save you from additional stress.

Do I still owe money after my car is repossessed?

Yes–you’ll likely still owe money after your car is repossessed. For a financed vehicle, the lender will typically sell the car at auction, but auction prices are usually well below retail value. The amount it’s sold for is subtracted from your loan balance, but you’ll still be responsible for:

• The remaining loan/lease balance
• Costs associated with repossession (such as storage or towing fees)
• Legal fees
• Any late payment charge

If your vehicle is leased, you may also have to pay for any excess mileage or damage to the vehicle.

Is there a way to get my car back after it’s been repossessed?

Realistically, you’re unlikely to get your car back if it’s been repossessed–whether voluntarily or involuntarily. If you want your car back, you’ll need to have a discussion with your lender as soon as possible. If the lender is willing, you’ll need to pay the missed payments, cover any fees that were incurred during the repossession, and come to a new agreement with the lender for future payments. Keep in mind that the lender can refuse your request and sell the vehicle to someone else.

Other options for getting your vehicle back after repossession include lump sum payments or buying it outright when the lender goes to sell it. Lenders often auction repossessed vehicles but may not tell you when or where they sell them. If you’re interested in buying back the vehicle, you can ask the lender for information on the sale.

How will a car repossession effect my credit score?

The lender will be responsible for reporting the repossession to credit bureaus, which can stay on your credit report for up to seven years.

A car repossession will result in a credit score drop, making it more difficult to secure other loans. Repossession could bring your credit rating down to an R8, which is just one above what it would be if you filed for bankruptcy (R9). This credit drop could happen once repossession takes place—whether it was voluntary or involuntary—and regardless of whether you end up getting your car back. Learn how to read your credit report to better understand how repossession could impact it.

How can I avoid a car repossession?

The only surefire way to avoid having your car repossessed is to keep up with the loan payments, even if it’s just the minimum amount. Make sure you understand your loan balance, interest rate, loan or lease term, and if there are any fees associated with a missed payment.

Financial situations can change quickly, and sometimes missed payments are unavoidable. If you’re at risk of repossession, you still have options. It’s best to act quickly when you find yourself struggling to make your car payments:

• Consider selling the car yourself. This is a good option if you have an alternative mode of transportation. You can put funds from the sale towards paying off the car loan.
• If you want to keep the vehicle, contact your lender immediately to inquire about an alternate payment plan. Explain your situation and let them know when you can catch up and what you can afford. Make sure to get any new agreement in writing.
• Talk to a Licensed Insolvency Trustee (LIT) about debt relief options. Eliminating or reducing other debt could free up enough money for you to continue paying your car loan. Book a free consultation to find out if a consumer proposal or bankruptcy is right for you.

Can I file a consumer proposal or bankruptcy and keep my car?

It depends on your situation, but most provinces and territories allow you to keep one motor vehicle up to a certain value. If your vehicle is worth more than your province’s exemption limit, you must pay the difference in order to keep it. Learn more about what assets you can keep in a bankruptcy.

For financed or leased vehicles, you must continue making your car payments to the lender to keep it. Since you don’t own the vehicle it’s not technically your asset, so you wouldn’t need to forfeit it in a bankruptcy. If your car loan is no longer affordable to you, it may be best to surrender the vehicle before you file. A LIT will be able to help you understand the best course of action for your situation during a free consultation.