Car Loan Debt Relief in Canada

Why car loan debt is growing

Auto loans were one of the biggest drivers of rising consumer debt in Canada in 2024. Non-bank auto loan debt jumped 11.7% year over year, pushing total consumer debt to $2.56 trillion by the end of the year.

The average new auto loan climbed to $35,586 in Q2 2025, up $1,567 from the year before.

Sources: Source: Equifax Canada – Q4 2024 Market Pulse and Equifax Canada – Q2 2025 Market Pulse.

At the same time, lenders tightened approval standards. Nearly one in five auto loan applications now goes through multiple rounds of review, up from one in ten before the pandemic.

The average interest rate on a Canadian car loan sat at around 6.90% as of June 2025.

Used-car rates are typically higher, between 7% and 10%. More than half of new car loans now stretch to seven years or longer, and that is where the trouble starts.

How car loan debt becomes unmanageable

A seven or eight-year loan makes the monthly payment look affordable, but the total cost tells a different story.

A $35,000 loan at 7% over 84 months costs roughly $9,200 in interest alone. Over 60 months, that same loan costs about $6,600 in interest. The longer term costs you $2,600 more and keeps you in debt for an extra two years.

The bigger risk is negative equity. Cars depreciate fast, losing roughly 20% of their value in the first year. On a long-term loan with a small down payment, you owe more on the car than it’s worth for years.

If you need to sell the car or it is written off, you are stuck covering the gap.

Warning signs you are in trouble

Car loan debt becomes a problem when it starts squeezing everything else. You know you are in trouble if you are falling behind on utility bills or rent because the car payment comes out first. Using a credit card or line of credit to cover everyday expenses is another clear signal.

If you are only making minimum payments on other debts, avoiding checking your bank balance, or hiding your financial situation from your partner, the situation is unlikely to improve on its own.

What happens if you stop paying

A car loan is a secured debt. The vehicle is the collateral. If you miss payments, the lender can repossess the car to recover what you owe.

Before that happens, missed payments get reported to the credit bureaus. Negative information stays on your credit report for up to six years in most provinces.

Source: Financial Consumer Agency of Canada – Credit Report Information.

A damaged credit score makes it harder to rent, borrow, or qualify for reasonable interest rates on anything else.

If the car is repossessed and sold for less than you owe, you are still responsible for the shortfall. That balance becomes an unsecured debt that the lender or a collection agency can pursue.

How to deal with car loan debt

Talk to your lender

If you are struggling, call your lender before you miss a payment. They have options. Refinancing the loan for a different term, deferring a payment, or restructuring the agreement are all worth considering.

Lenders prefer to work with you rather than repossess a depreciating asset.

Look at the full picture

If the car loan is one part of a bigger debt problem, including credit cards, personal loans, or overdue bills, the car payment alone is not the issue.

A consumer proposal lets you deal with unsecured debts by repaying a portion over a fixed period. Your creditors forgive the rest, and your payments stay the same from start to finish.

The car loan itself is secured, so it sits outside the proposal. As long as you keep up the car payments, you keep the vehicle.

Get advice early

If you are unsure where you stand, talk to a Licensed Insolvency Trustee. The consultation is free, and you will get a clear picture of which options fit your situation.

FAQ

Can a car loan be included in a consumer proposal?

The unsecured portion can. If your car is repossessed and sold for less than the outstanding balance, the shortfall becomes an unsecured debt that qualifies for a consumer proposal. If you are still making payments and want to keep the car, the loan stays outside the proposal as a secured debt.

How long does a missed car payment stay on my credit report?

Negative information from missed payments stays on your credit report for up to six years in most provinces. The impact on your credit score is immediate and makes it harder to qualify for future borrowing at reasonable rates.

What happens if my car is repossessed?

The lender sells the vehicle and applies the proceeds to your outstanding balance. If the sale does not cover what you owe, you are responsible for the remaining amount plus any costs the lender incurred. That shortfall becomes an unsecured debt.

How do I avoid getting into car loan trouble?

Keep the loan term to five years or less. Put down at least 10% to 20% to avoid negative equity from the start. Budget for the total cost of ownership, not just the monthly payment. That includes insurance, fuel, and maintenance.

If car loan debt is part of a bigger financial problem, our Licensed Insolvency Trustees offer a free, confidential consultation. We will look at your full picture and help you work out the most sensible route forward.