How to Get Out of a Car Loan in Canada When You’re Struggling

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How to get out of a car loan in Canada is a question many people face when loan payments become too much to handle—and the answer depends on your financial goals, vehicle value, and available options.

Owning a car in Canada is often more than a convenience—it’s a necessity. Whether it’s commuting to work, taking your kids to school, or running everyday errands in areas with limited public transportation, having a reliable vehicle is part of daily life for millions of Canadians. But when your car loan becomes unmanageable, what once felt like a lifeline can quickly turn into a financial trap.

Life happens—job loss, rising interest rates, inflation, or unexpected expenses can make even a reasonable car loan suddenly unaffordable. If you’re feeling overwhelmed or falling behind on your payments, you’re not alone. Many Canadians are in the same position, asking the same critical question: “Can I get out of my car loan without destroying my finances?”

The good news is that you do have options. From refinancing and selling your vehicle to seeking legal debt relief, there are multiple paths to take. Some allow you to keep your vehicle; others may require giving it up. Each option has pros, cons, and financial implications you need to weigh carefully.

There are several practical ways to get out of a car loan in Canada, whether your goal is to reduce monthly payments, eliminate debt, or start fresh financially. With the right information and support, you can make an informed decision that helps you regain control of your finances and secure a more stable future.

1. Sell the Car Privately

Selling your car privately often yields more money than a dealership trade-in, which can make it easier to pay off your car loan in full.

Best for: People whose car is worth as much or more than what they owe.

Steps:

• Use tools like Canadian Black Book or AutoTrader to estimate your car’s market value.
• Request a payout statement from your lender to confirm your remaining loan balance.
• Sell the car and use the proceeds to pay off the loan.
• If the sale price is less than the balance, you’ll need to pay the difference—this is called negative equity.

2. Trade in the Vehicle

You can trade your vehicle in at a dealership and apply its value toward a more affordable one. If you owe more than it’s worth, the dealer might roll the negative equity into your new loan.

Example: If you owe $20,000 but your car is worth $15,000, the $5,000 shortfall may be added to the new loan.

Best for: People who still need a car but want lower payments.

3. Refinance the Loan

Refinancing involves taking out a new loan—ideally with a lower rate or extended term—to replace your current one.

Best for: People with fair to good credit who can still afford lower monthly payments.

Steps:

• Compare offers from banks, credit unions, and online lenders.
• Apply for refinancing using your car as collateral.
• Use the new loan to pay off your existing one.

4. Talk to Your Lender

Lenders may offer relief options if you’re struggling but proactive. If you reach out early, many lenders are willing to work with you to find a temporary solution that can ease the burden.

Best for: This option is ideal if you’re facing temporary financial difficulties and want to avoid giving up your vehicle.

Possible Solutions:

• Payment deferrals – Lenders may allow you to temporarily pause or delay payments, giving you time to stabilize your finances.
• Loan term modifications – Adjusting the length of your loan can help lower monthly payments, making them more manageable in the short term.
• Reduced interest rates – Lenders may offer to lower your interest rate, reducing the amount you pay over time and easing the financial strain.

5. Voluntary Repossession (Voluntary Surrender)

In this scenario, you return the car to the lender. They sell it at auction and apply the proceeds to your loan. You’re responsible for any remaining balance.

Example: If the car sells for $10,000 and you owe $17,000, you’ll still owe $7,000, plus possible fees.

Best for: People who can’t keep up with payments and no longer need the car.

6. Use a Consumer Proposal or Bankruptcy

If your financial troubles go beyond your car loan, a consumer proposal or bankruptcy may be necessary.

Best for: Those overwhelmed by debt with no realistic way to keep up.

Consumer Proposal

A legal agreement negotiated through a Licensed Insolvency Trustee (LIT) to settle your debts for less than you owe. If you surrender your car, the remaining loan shortfall can be included in your proposal.

Bankruptcy

Erases most unsecured debts. You may have to give up the vehicle unless it’s needed for basic living or work, or if it has little equity.

How a Licensed Insolvency Trustee Can Help

A Licensed Insolvency Trustee (LIT) is a federally regulated debt expert who can help you legally resolve financial problems through consumer proposals or bankruptcy.

Ways an LIT Can Help with Your Car Loan:

1. Include the Car Loan Shortfall in a Consumer Proposal

• If you return your vehicle, the leftover debt can be treated as unsecured and settled for less.
• The LIT ensures proper surrender to avoid penalties.

2. Help You Keep the Car While Reducing Other Debt

• If car payments are manageable but other debts aren’t, the LIT can reduce or eliminate those other debts, freeing up cash flow.

3. Discharge the Car Loan Entirely in Bankruptcy

• If surrendering the car makes sense, the LIT will help you do so and ensure the unpaid balance is legally discharged.

Benefits of Working with an LIT:

• Debt Relief Options
  An LIT can help you legally reduce or eliminate your car loan obligations—especially if your car has been repossessed or you’re facing negative equity. Whether through a consumer proposal or bankruptcy, they can include car loan shortfalls and other unsecured debts into one manageable plan. This can provide significant financial relief and help you avoid ongoing interest charges or collection activity.
• Stops Collections Immediately
  As soon as you file a consumer proposal or bankruptcy with an LIT, all creditor actions must stop. This includes collection calls, wage garnishments, legal actions, and repossession efforts. The legal protection, known as a “stay of proceedings,” gives you immediate peace of mind and a break from creditor pressure.
• Professional Guidance
  LITs provide expert, personalized advice based on a full review of your financial situation. They are legally obligated to act in your best interest and are not motivated by commissions or sales. This ensures the solution they recommend is truly the most practical and affordable option for your circumstances.
• Keep or Return the Car
  LITs will help you evaluate whether it makes more sense to keep your vehicle or surrender it, depending on your overall budget and loan terms. If you keep the car, they can help you reduce other debts to make payments more manageable. If returning it is better, they ensure the process is handled in a way that limits further financial consequences.
• Government-Regulated
  Licensed Insolvency Trustees are federally regulated by the Office of the Superintendent of Bankruptcy (OSB). This means they must adhere to strict professional and ethical standards, and you are protected under Canadian law throughout the process. Their services are transparent, monitored, and designed to ensure fair treatment for all parties involved.

When to Contact an LIT

Consider speaking with an LIT if:

• You’re behind on your car loan payments or facing repossession.
  Falling behind can quickly lead to repossession and legal action, so early intervention from an LIT can help you avoid more severe consequences.
• The car is worth much less than what you owe (negative equity).
  If you’re trapped in a loan where the balance far exceeds the vehicle’s value, an LIT can help you eliminate or reduce that shortfall.
• You’re using credit cards or lines of credit to make car payments.
  Relying on other debt to cover your loan signals an unsustainable financial situation, which an LIT can help you resolve through structured debt relief.
• You’re overwhelmed by multiple debts and need a full financial reset.
  When your car loan is just one part of a bigger debt problem, an LIT can guide you through comprehensive options like a consumer proposal or bankruptcy.

A Practical Path Forward

Getting out of a car loan in Canada can be complex, but you’re not without solutions. Whether your goal is to lower payments, walk away from the vehicle, or reset your financial life, the most important step is to be proactive.

Before deciding:

• Know your car’s market value.
• Understand your loan balance and terms.
• Get professional advice—especially from a Licensed Insolvency Trustee if debt is a bigger issue.

Working with a Licensed Insolvency Trustee (LIT) is an essential step, as they can provide expert guidance tailored to your financial situation and help you explore all viable options. Whether you need to lower payments, reduce your debt, or even discharge your car loan entirely, an LIT offers a legal, structured solution to get you back on track.

Doing nothing can lead to worsening debt and long-term credit damage. But with the right support, you can make an informed choice—and find a clear answer to how to get out of a car loan in Canada.

Don’t let your car loan hold you back any longer—reach out today to schedule a free consultation with a Licensed Insolvency Trustee near you and start your path to financial freedom.

Contact Richard Killen
FREE No Commitment Consultation

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