How to get out of a car loan in Canada?
Purchasing a car exhilarates you, but it also creates a substantial financial commitment. However, life is unpredictable and circumstances can change. If you struggle to make payments, you may wonder how to get out of a car loan in Canada. In this article, we’ll explore the process of ending a car loan and highlight various aspects you need to consider.
Understanding Car Loans in Canada
Before delving into the details, let’s review the basics of how car loans work in Canada. A car loan creates a financial agreement between you and a lender, typically a bank or a dealership. As a result, you purchase a vehicle by borrowing money. Next, you repay the loan in monthly installments over a specified period of time, typically 36 to 72 months.
What is a Car Loan?
A car loan is a type of secured loan, where the vehicle serves as collateral for the lender. This means that if you fail to make payments, the lender can repossess the vehicle to recoup their losses.
When you apply for a car loan, the lender will consider various factors. Typically, these include your credit history, income and the value of the vehicle. These factors help the lender determine the interest rate and loan terms that they offer you. It helps to shop around and compare offers from different lenders to ensure you get the best deal.
Car loans provide an opportunity for individuals who may not have enough cash to purchase a vehicle outright. By spreading the vehicle’s cost over a set period, car loans make it more affordable to buy a car.
Typical Terms and Conditions of Car Loans
Car loans come with terms and conditions that vary depending on the lender and your individual circumstances. Some common terms include the interest rate, the loan term and any associated fees or penalties. Carefully review these terms before signing a car loan agreement to understand the financial obligations and potential consequences.
The interest rate is a crucial factor to consider when taking out a car loan. It determines the cost of borrowing and affects the total amount you will repay over the loan term. The interest rate can be fixed or variable. In short, fixed rates remain the same throughout the loan term, while variable rates may change based on market conditions.
The loan term refers to the duration over which you will repay the loan. Longer loan terms typically result in lower monthly payments but may lead to paying more in interest over time. On the other hand, shorter loan terms may have higher monthly payments but can ultimately save you money on interest.
In addition to interest rates and loan terms, car loans may come with fees and penalties. These can include origination fees, prepayment penalties and late payment fees. By understanding these charges, you can factor them into your budget when considering a car loan.
Legal Aspects of Cancelling a Car Loan in Canada
Canceling a car loan in Canada involves legal aspects associated with the process. Familiarize yourself with the following key factors:
Early Payment Penalties
Some car loans come with early payment penalties, which are fees charged if you pay off your loan before the agreed-upon term. These penalties compensate the lender for potential lost interest. Certainly, early payment penalties can vary depending on the terms and conditions of your loan. They can range from zero to five percent.
When considering canceling your car loan, carefully review your loan agreement for any early payment penalties. These penalties can significantly impact the overall cost, so consider the financial implications before making a decision.
Additionally, some lenders may offer car loans without early payment penalties. Therefore, compare different car loan options and inquire about the presence of such penalties before finalizing your loan agreement.
Legal Rights and Obligations
As a borrower, you have legal rights and obligations when it comes to canceling a car loan in Canada. These are governed by specific laws and regulations that vary from province to province.
Some provinces offer cooling-off periods that allow buyers to step back and withdraw from an agreement. For instance, you have two days to change your mind after signing a financing contract in Quebec. However, no other province or territory has this type of arrangement so you must follow through on your commitment.
If you think you have a case, consult with a legal professional who specializes in consumer protection laws or contract law. This directory can point you to a lawyer in your area:
|Province or territory
|Law Society of British Columbia
|Law Society of Alberta
|Law Society of Saskatchewan
|Law Society of Manitoba
|Law Society of Ontario
|Le Barreau du Québec
|Law Society of New Brunswick
|Nova Scotia Barristers’ Society
|Prince Edward Island
|Law Society of Prince Edward Island
|Newfoundland and Labrador
|Law Society of Newfoundland and Labrador
|Law Society of Nunavut
|Law Society of the Northwest Territories
|Law Society of Yukon
Steps to Get Out of a Car Loan
If you’ve decided that getting out of your car loan is the best option for you, take these steps:
Assessing Your Financial Situation
First, assess your financial situation thoroughly. Create a budget to understand your income, expenses and debt obligations. This will help you determine if canceling the car loan aligns with your long-term financial goals. Next, take a good look at your credit score. This will help you gauge if you will have more success with a traditional lender or an alternative source of financing.
Communicating with Your Lender
Once you’ve evaluated your financial situation, communicate with your lender. Discuss your circumstances openly and honestly. They may have options available to help you, such as loan modification or deferment.
Refinancing Your Car Loan
If you struggle with the current terms of your car loan, refinancing might resolve the tension. Research various private lenders and compare their offerings to secure a loan with more favourable terms. For instance, you may seek a lower interest rate or extended loan term.
Selling Your Car
One of the most common ways to reset your finances is to sell a vehicle with a loan on it. However, stop to calculate the outstanding balance on your loan compared to the market value of your car.
If the car’s worth exceeds the amount of the loan, selling it will leave you free and clear. However, if you owe more than the car’s value, you will need to find more money to settle the loan. Since new cars lose their value fast, you can easily end up at a disadvantage when trying to resell.
Trade in your vehicle for a cheaper one
If you cannot afford the car you have, you can always trade it in for a cheaper model. That way, you can use the extra funds against your loan.
The dealership will take the value of your trade-in financed car minus the current loan amount. Next, they deduct that amount from the price of your next vehicle. As a result, you can start anew with a new car, different loan terms and possibly lower monthly payments.
However, if you have gap insurance, you won’t owe anything else to the lender. This coverage costs a fraction of the amount of comprehensive and collision premiums but really helps out in this situation.
When you willingly surrender your car to the lender, you’re exercising voluntary repossession. If you can no longer make your payments, you drop off the vehicle as collateral against your loan. This spares you from extra stress and the sight of a bailiff towing your car away if the lender repossesses it. It also saves you from paying for storage costs which the lender can add to your loan.
However, a voluntary repossession will be noted on your credit record for seven years. You could also lose up to 150 points on your credit score, depending on your credit history.
For best results, communicate clearly with your lender when you decide to hand them your keys. You still have to pay for the deficient between what you owe and what the lender gets when they resell the car. This cost will include any additional fees, so skipping the bailiff and other costs will help you clear that debt sooner.
Cancel or transfer your car insurance
If you sell, trade in or give up your car as collateral, you must inform your insurance provider right away. After all, you don’t want to remain liable if the new owner ends up in a collision that injures someone. If a collision causes damage beyond your deductible, you could face financial consequences beyond your control.
First, contact your insurance company to inform them of your decision. Second, provide proof of the transaction that changes the car’s ownership. This could be a bill of sale or a letter from your lender, acknowledging your voluntary repossession.
Next, the insurance company or broker will cancel your insurance policy or transfer it to your new vehicle. If you transfer, you can compare car insurance rates that may change due to the value of your current car. This could generate additional savings for you.
Getting out of a car loan in Canada: The Bottom Line
Choosing to get out of a car loan in Canada should not be taken lightly. First, thoroughly evaluate your financial situation and explore all available options before making a final decision. Consulting with a financial advisor or legal professional can provide valuable guidance throughout the process. Remember, proactive communication and legal knowledge about canceling a car loan helps you navigate this challenging situation with greater confidence.
FAQs About Getting Out of a Car Loan in Canada
In most provinces, you can only get out of a car loan after signing it if the contract has a stipulation for this circumstance. Otherwise, you must follow through on your promise to repay the funds you agreed to borrow. However, Quebec stands out as the exception. In this province, you can cancel your financing contract within two days of signing it.
A predatory car loan makes unrealistic promises and creates unfair or unreasonable loan terms with desperate borrowers. If a lender skips any risk assessment or presents documents with spaces “to fill in later,” you could put yourself into a deeper financial hole. Federal and provincial consumer laws only protect buyers when the lender is regulated, so check before signing your loan papers. If you do borrow from a predatory lender, you can get out of your loan with bankruptcy alternatives for Canadians struggling financially. These include credit counselling, a debt consolidation loan, a debt management program, a consumer proposal to your creditors or by declaring bankruptcy. Of these options, a consumer proposal or bankruptcy will get you out of a car loan, but with serious consequences. For instance, you will lose the car and hurt your credit score. As a result, you may find it very difficult to finance a new car in the future.
If you feel the lender violated consumer laws, you can consult with a lawyer to see if they can find a loophole to get you out of a car loan. Consumers have legal rights and obligations when it comes to canceling a car loan in Canada. However, they vary from province to province so find an expert in your area. Also, federal laws regulate banks and provincial consumer laws cover credit unions and other regulated lenders. If you enter a contract with an unregulated lender, it is harder to leverage any laws in your favour.
When two people cosign a loan, the car owner is responsible for making the payments, with the second party as a backup. Therefore, you are both liable for your commitment. If either person wants to get out of a cosigned car loan, you must refinance the loan in one person’s name. If you agreed to cosign a car loan to help out a person in financial distress, you can help your cosigner by coaching them to improve their credit score.
If you want to get out of a car loan early, you have a few options:
-Sell the car and pay off the loan.
-Increase your payments so you pay less in interest overall.
-Refinance to consolidate your car loan with your other debts.
-Trade in your car for a cheaper model and use the balance to clear your loan.
Of course, check your loan agreement to see if it has any terms that make these unworkable. You want to avoid any early repayment penalties that would put you in a financial bind.
Negative equity car loans have an imbalance when you owe more than the car’s value. Therefore, selling your car won’t clear your debt. This can happen when variable interest rates change or your car loses value soon after you buy it. To get out of a negative equity car loan, you can make extra payments to bridge the difference. You can also trade in your car for one of lesser value. That way, you have more money available to catch up on your original car loan. Finally, you can buy gap insurance to protect yourself from this scenario. This optional coverage covers what you owe on your car versus its actual cash value.
You can cancel a car loan within 24 hours in only one province: Quebec. In fact, you have two days to end your financing contract in Quebec. However, in every other part of Canada, you must repay your car loan, unless your contract has a clause about early cancellation.