An image of an old-fashioned alarm clock against a colourful background.

What happens if you’re delinquent on your car loan?

It’s something that happens to a lot of people: your circumstances change and all of a sudden you’re having trouble paying your bills.

Before things get to this point, it’s important you understand the consequences that stem from not being able to pay your car loan. Because they can be quite serious.

Missing a payment is known as being delinquent. This can refer to simply missing a payment by a day. But the consequences are different depending on how long you’re delinquent for.

Below, we take a look at the different stages of delinquency and what they mean for you.


Missing a payment


Missing one payment can have different consequences depending on how long your payment is delinquent. Forgetting to pay your bill for a day after years of paying on time is unlikely to have a major impact.

However, if days pass and you still haven’t paid, the lender might give you a call to find out what happened.

If days turn into weeks and you still can’t come up with the money, that’s when the consequences really get serious.


Going to collections


If your lack of payment goes on for weeks, it’s likely you’ll be sent to collections. This is when the lender hires a company that specializes in working to get you to pay back what you owe.

There are different rules governing collections in different provinces. For instance, in Ontario, a collections agency has to first contact you via a written letter through the mail (email doesn’t count).

It’s important to know that once you’re sent to collections, there is a risk that the lender could report your lack of payment to a consumer credit agency, which could result in your credit score getting dinged. Your credit score is important: it helps lenders determine whether you can be relied on to pay back the loan. Not paying could lead to a bad credit score, making some lenders reluctant to give you money and raising your interest rates when you do borrow money again.


Defaulting on your loan


Eventually, if you fail to make your payments for multiple months and you do not commit to a plan to pay the money back, you will be deemed to have defaulted on your loan.

This is where the lender can take serious legal action against you. They could attempt to take you to court and get a judgment against you: this opens the door to the lender seizing your assets (for instance, a car you bought with a car loan), or even being granted permission to garnish your wages until the debt is settled.

Defaulting on a loan will also have a devastating impact on your credit score – much more so than being sent to collections. Essentially, there will be a huge red flag on your credit file saying you could not pay back your loan and the lender was forced to take legal action against you. Many lenders will be very reluctant to lend to someone like that in the future.


In conclusion


It’s important to make sure you’re making your payments on time and that you’re not taking on a loan that you can’t afford.

Make sure before you take on your loan that you know not only what your interest rate is but what your monthly payments will be. Sit down and look at how much money you earn every month and what you spend on housing, food and transport. Can you afford to add a car payment to that? Will you still be able to save money on top of that?

Never take on a loan you can’t afford. It will save you from ever having to experience the issues we’ve covered above.