Car being towed away

How does repossession work?

Everyone who takes out a car loan knows they have to negotiate a repayment schedule that they think will work for them, in order to pay back to the lender; but what happens if you can’t make the payments after all? In many cases, this results in repossession of your car by the loan provider.  Canadian repossession laws vary from province to province, and it is vital that you consult a legal attorney familiar with the repossession law in your home province if you find yourself in a sticky situation.

Involuntary repossession

In Canada there are two types of repossession, with involuntary being the one that comes to mind when people think of repossession.

Involuntary repossession will happen when you stop making repayments. The first payment that you are late on, or miss entirely, will force you into something called delinquency. This means that you have violated the terms and conditions you agreed upon with the lender when you took out your loan. If you manage to catch your lender soon after your first missed payment, you will be able to pay the outstanding cost without facing repossession, however you will be charged a late fee and you run the risk of seeing your interest rate increase.

In the worst case scenario, though, you continue to miss repayments. In that situation, your lender has the right to take back your car, and will usually do this by sending a bailiff to your residence to collect it. While they are instructed not to use force, you should not try and stop the repossession from taking place. Bailiffs are merely messengers sent on behalf of the lender, so do not physically or verbally abuse them. The time to try and stop your repossession was before your lender sourced a bailiff. If you find yourself in this situation, although it is unfortunate and often stressful, try to remain calm.

Voluntary repossession

The second type of repossession is known as voluntary repossession, and it's pretty self explanatory. In this scenario, as soon as you realise that you can not make your car payments, the best thing to do is give your insurer a heads up and see if you can reach a compromise. If you feel that you can not make payment for the foreseeable future, then it may make sense to return the car to your lender then and there. This can save you even more money, as involuntary repossession can incur fees that are forced upon you, such as storage and towing fees.

Unfortunately, voluntary repossession will still have a negative effect on your credit.

Selling your vehicle

Once a lender repossess a vehicle, they will almost immediately sell it to get the best value as possible-cars depreciate in value by the day. There are all kinds of auctions throughout Canada, however one of the most famous is the Toronto Auto Auction.

Most provincial law states that if you’re behind on the payments of your car loan or lease, the lender has the legal rights to sell a repossessed car in order to recover the funds they are owed. If the car does not cover the value, then you are still classed as being liable for the owed money-even though you no longer own the car. In fact, in many provinces such as Ontario, the lender is then allowed to sue your for an outstanding money owed.

Seize or Sue

In some provinces, such as British Columbia or Alberta, a seize or sue law is in place which means that a creditor must choose whether they want to proceed with seizing your car, or sueing you for the money owed. They can not do both. 

Aboriginal Reserves

Under Canadian law, local leaders in Canadian aboriginal reserves have the right to refuse entry to their land to anyone they choose. This, as you may imagine, can make repossession from reserves very difficult. If you find yourself in this situation it may be easier for you to call your lender in advance and try and work out a new repayment schedule, or a way to make the process smoother for everyone.

How will repossession affect your credit?

Like most things that negatively impact your credit report, a repossession will stay on your credit report for up to seven years. That does mean that getting a car loan, mortgage or any other type of loan in this time can be difficult and leave you with soaring interest rates.

However, there are a few things you can do during this time to ensure that you credit score can be resurrected at some point. If you have any other accounts open or loans payable, work hard to make your payments on time so that you don’t receive any more negative marks on your record. Furthermore, ensure that you use any other line of credit wisely in this time so that you can rebuild your credit and improve your score.

 

When it comes to repossession, one thing that may provide some relief is that usually this is the last resort for most car lenders. It can become a hassle for them, as well as incur a lot of extra costs that they would rather avoid. Instead, most loan providers would prefer that you figured out a way to pay the amount owed to them. They can be quite flexible if you are open, honest and upfront with them. If you are fearful that you will end up in a repossession situation, don’t be afraid to enter into a conversation with your lender and see if there is a way to rearrange your payment schedule. Although this may increase your interest, or the loan term, it is definitely the best case scenario.