Ever wonder what happens when someone defaults on their car loan payments? The lender can seize the vehicle and sell it to pay back the loan. But does that mean repossession can happen without notice if you default on your car loan? Will you suddenly find yourself without a vehicle when you need it? If you're concerned about repossession (also known as repo), or you just want to know how it works, here’s a rundown of what you should know.
What is repossession?
Vehicle repossession happens when your lender or leasing company takes back your car because you’ve fallen behind on payments. Basically, if you're leasing or financing a car and can’t keep up with the payments, your vehicle could be repossessed.
When you get a secured loan for your car, the vehicle itself serves as collateral, meaning the lender technically owns it until the loan is paid off. Lenders and leasing companies can legally repossess the car as soon as you miss a payment, though it usually doesn’t happen until you’re about 90 days behind. If you fall too far behind on your car payments, the lender will usually notify you about the missed payments. If you don't work out a payment plan or can’t make the car payments, they can begin the repossession process and send someone to take the car back.
The lender repossesses the vehicle to recover some of the money you owe. Once the car is repossessed, they’ll either try to sell it at a fair market price or auction it off to help the lender recover what’s owed on the loan or the value of the vehicle. However, if the car sells for less than the outstanding debt, you’ll be responsible for covering the remaining balance. You will also be on the hook for any costs tied to getting the car back, like paying for towing, storage, and repossession fees.
Types of repossession
Car repossession can happen in two ways: involuntary or voluntary. We will provide detailed highlights of each below:
Involuntary repossession
Repossession is usually involuntary. Involuntary repossession is when the lender sends someone, like a repossession agent, to take your car.
Voluntary repossession
Voluntary repossession, or voluntary surrender, is when you decide to return the car to the lender yourself. Voluntary repossession can save you from some of the extra costs tied to involuntary repossession. Plus, it might look better to future lenders, as it shows you took responsibility and worked with your lender to resolve the situation.
Repossession laws in Canada
Repossession laws vary depending on where you live in Canada. These laws are -p[o designed to protect both the debtor and the creditor by outlining clear steps for how repossession and the sale of the repossessed car should happen.
For example, in Alberta and British Columbia, there’s a "seize or sue" law. This means the creditor has a choice: they can either repossess the vehicle or sue you for the amount owed, but they can’t do both. Whereas in Ontario, creditors can both repossess the vehicle and sue for any remaining balance on the loan.
Lenders in Canada must follow certain procedures to protect your rights during repossession. They have to provide written notice before taking your property. This means they cannot just show up and take back your vehicle. They must also give you a detailed list of what was repossessed. This list should include a description of the personal property, where it was taken from, and any existing damages.
Repossession laws in Canada are in place to ensure both parties are treated fairly. Whether you’re facing repossession or are a creditor looking to recover property, it’s a good idea to get legal advice to make sure your rights are fully protected.
How to avoid repossession of your car
The best way to prevent your car from being repossessed is to make sure you’re paying your bills on time and in full. However, if you're struggling, there are steps you can take to try and avoid repossession:
Speak to your lender
Car repossession is the lender's last resort. They don’t want the hassle of taking your car, selling it, and then trying to collect any remaining balance from you. So, the moment you realize you might miss a monthly payment, reach out to your lender to see if you can work out a repayment or refinancing plan.
Speak to a Licensed Insolvency Trustee
If you know there’s no way to catch up or keep making payments, it’s time to talk to a Licensed Insolvency Trustee (LIT) to explore your options. They can help you understand your financial situation and explore debt management options. You might be able to adjust your budget and debt payments to avoid repossession altogether.
Consider selling your car
If you’re struggling to afford your car payments, selling the vehicle before repossession becomes a possibility, which might be a smart move. By selling it yourself, you can try to get enough money to pay off your loan. You'll likely get more money by selling it privately than the lender will by selling it at an auction. So, even if you can't sell it for the full amount that you owe, you may end up owing less than you would if the lender sold it for a lesser amount.
What to do if you can't avoid repossession
Avoiding car repossession isn’t always possible, especially if your debt is already in default. However, there are a few steps you can take to lessen the impact:
Don’t hide your car
It’s never a good idea to try and hide your car. The longer it takes for the lender to recover the vehicle, the more repossession fees you might owe. If they can’t find it—like if you're keeping the car in a locked garage—they could take legal action to force you to hand it over.
Consult with a professional
Since repossession laws differ from place to place, it’s a good idea to speak with an attorney or financial expert. They can help you understand your rights and the repossession process in your province.
Can you get your car back after it's been repossessed?
It's unlikely for you to get your car back after repossession, but it's not impossible. To do so, you’d need to work out a deal with the lender to start making payments again and cover any repossession-related fees. However, the lender isn’t obligated to agree—they can simply choose to sell the car instead.
To recover your vehicle, you’ll need to catch up on all missed payments and cover the repossession costs. If you come into a lump sum of money, you could settle the loan in full, though that’s a rare scenario.
Your last option is to buy the car when the lender puts it up for sale, often through an auction. But it can be tricky because lenders don’t always inform you when or where the car will be sold. If you want to try buying it back, you can ask the lender for details on the sale.
Can you avoid having your car repossessed if you file for bankruptcy?
If you’re juggling multiple debts and exploring debt management options, it’s important to know that filing for Bankruptcy or a Consumer Proposal won’t stop a car repossession. Since a car loan is a secured loan, it doesn’t get wiped out in Bankruptcy.
Filing for Bankruptcy can, however, help free up some cash by eliminating unsecured debts like credit cards or personal loans. This might give you more breathing room to keep up with your secured loans, including car payments.
Before deciding on Bankruptcy, it’s a good idea to talk to a Licensed Insolvency Trustee (LIT). They can help you understand your financial situation and walk you through the different options available.
Does repossession affect your credit score?
The short answer is yes. Whether it's an involuntary or voluntary repossession, your credit history and credit score will take a hit. In fact, it can lower your score by as much as 60 to 240 points.
A repossession is often reported to the three Canadian reporting agencies (Equifax, Transunion, and Experian,) and it can stay on your credit report for up to seven years, making it harder to get approved for a car loan, mortgage or any other type of loan. Even if you do find a lender willing to work with you, you’ll likely face a high interest rate.
On top of that, the credit issues that usually lead to repossession, like missed payments or defaulting on loans, can also leave negative marks on your credit report. Payment history is one of the biggest factors in determining your credit score.
Car insurance and repossession
If you find yourself struggling to make your car payments, chances are good that you may be struggling to make your car insurance payments as well. Remember, it's illegal to drive a vehicle without at least the minimum coverage for liability car insurance and accident benefits coverage in Canada. If you don't make your insurance payments, you could suddenly find yourself without car insurance. Driving uninsured could lead to hefty fines, licence suspensions, or even jail time.
If you're struggling to make your car insurance payments, it’s important to reach out to your insurer right away. Letting them know about your situation can help you avoid a non-payment cancellation, and they might even offer to adjust your payment plan.
What happens if I stop making payments without cancelling my car insurance policy?
If you stop making payments without officially cancelling your car insurance, you could face some serious problems. Your insurance company will keep charging you for the policy as long as it’s active, and they’ll keep asking for payment.
Having your car insurance cancelled due to non-payment can create a problem for you in the future when you're ready to get car insurance again after a cancelled policy. It can also lead to having your vehicle repossessed. Here’s what occurs if you discontinue payments without canceling your car insurance policy:
Non-payment cancellation
The most common reason for an invalid auto insurance policy that leads to it being cancelled is non-payment. This happens when a policyholder misses a payment. If you skip an insurance payment, even just one, your insurance company will give you a set number of days (usually around 15) to pay the balance. If you don’t make the payment by the deadline, they may cancel your policy.
If your insurance company cancels your policy, you’ll still be responsible for paying the outstanding balance. On top of that, you won’t be able to get a new auto insurance policy from another provider until the balance is fully paid off.
Repossession due to cancellation
If your car is leased or financed and your insurance policy gets cancelled, you could be at risk of repossession. Most lenders or leasing companies require you to have valid auto insurance for the entire term of the agreement. This usually includes meeting your province’s minimum coverage requirements and sometimes additional coverage like collision insurance and comprehensive coverage. If your policy is cancelled and your lender finds out, they might repossess the vehicle.
How to avoid a non-payment cancellation
The best way to avoid a non-payment cancellation is to contact your insurance company or insurance broker as soon as you know you won't be able to make a payment. They can help you figure out the best move from there, like setting up a repayment plan or walking you through how to cancel your car insurance policy early.
Looking for assistance with car insurance? BrokerLink is here to help.
If you're having trouble keeping up with your car insurance payments, our expert insurance team at BrokerLink is here to help. We can walk you through your options and speak with your insurance provider on your behalf to try to help you avoid a policy cancellation due to non-payment. We can even work with your insurer to help you set up a repayment plan if possible.
You can reach us by phone, email, or in person at any one of our locations across Canada. Our brokers are happy to answer any insurance-related questions you may have. You can also take advantage of our free car insurance quotes by using our free online quote tool today.
Get an auto insurance quote
[phone]
