Can Your Car Loan Land You In Debt Problems?

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Taking out a loan to buy a car is a common practice in Canada but you could land in some financial trouble if you do not do it right. You must be wondering how can car loans lead to debt problems. Well, there are many reasons why you could land up in a debt trap by borrowing a car loan or financing your car even at zero percent interest rates.

If you are planning to buy a new car by taking out a loan or you have recently purchased a car and will now be paying monthly installments for the same, this article is for you. In this article, we will be looking at the ways that bad debt car loans can affect you and how you can avoid certain mistakes to smoothly complete your loan term and make all your payments on time. 

What Is Car Loan Debt?

A car loan debt is a way of financing a new car that you wish to purchase. This type of loan allows you to deposit a part of the total amount when you are purchasing a new car and the rest of the amount can be paid off in smaller monthly installments over the term of the loan. There are some dealerships that allow you to make a zero down payment at the time of purchase and the entire price of the car is broken down into monthly installments. As with any loan, car loans also come with an interest rate charge on the entire amount. These interest rates can be high or low depending on factors like your credit score, source of income, and credit history. Some loans offer zero percent financing but there might be some other criteria that you will have to fulfill. 

A long-term car loan is a seemingly good option as you do not have to make any big payments but multiple smaller payments. This might lead you to pay a higher amount overall during the term of the loan in interest and any other charges. When choosing a car loan, make sure you consider the loan term, interest rates, and how much each installment would add up before you sign up. This will help you in choosing only what you can comfortably pay without having to lose any assets or affecting your credit score.

How Can Car Loans Lead To Debt problems?

Now that we understand the concept of car loans, let us identify bad debt car loans and how a car loan can land you in problems financially. A car loan with zero down payment or zero percent financing can tempt you to go for a more expensive car that may or may not fit into your budget. It is with these attractive offers that many buyers end up buying a car that is too expensive for their pocket. A bad car loan affects your personal finances, credit report, and security. Longer repayment periods, high-interest rates and having to pay an overall amount that is higher than the overall cost of your are some ways a loan can turn negative for you. 

When borrowing a car loan, debt-to-income ratio (DTI), credit scores and credit history are some factors that are taken into consideration by lenders. A car dealership on the other hand might offer you a car loan through their financing department even if you slightly miss on meeting their eligibility criteria. The catch here is that your interest rates will be high and your monthly installments could be higher than what you can manage to pay. Having a major additional expense can affect your personal finance majorly. 

Not being able to repay the loan or missing out on payments is a common cause of your credit scores dropping. When it comes to your credit score, Canada-based car dealerships are lenient in offering you a car loan. But a bad credit score will make it difficult for you to borrow any other debt in the future. 

A car loan is a secured debt where the collateral involved is the car that you are purchasing. In case of failed repayment, your creditor has the right to seize your vehicle. This will lead to the loss of your car that you have paid a certain amount for. 

How Can You Avoid Falling Into A Debt Trap?

Looking at the answers to “how can car loans lead to debt problems?” you must be wondering about ways to avoid falling into a debt trap and managing your finances well to make timely repayments. The following steps will help you avoid falling prey to car loan debt. 

  • Look at the bigger picture and be realistic. Attractive offers and discounts from a dealership can lead you to buy a bigger car but you must always consider what you can actually pay for. Calculate the overall amount you will have to pay and if you could manage the same. Buy what you can afford and do not fall for schemes of longer repayment terms. 
  • Make a major down payment. Paying off a major portion of the total amount is a good way to reduce the burden on your monthly expenses for the months to come. You will have to pay smaller installments if you can manage to pay a bigger amount at the time of purchase. 
  • Plan your weekly and monthly expenses considering the amount you will have to pay in installments every month. Reduce on useless expenses to accommodate loan repayments. 

Debt Relief Solution For Car Loans

Robert Kiyosaki rightly quotes, “Good debt is a powerful tool, but bad debt can kill you.” if you have landed in financial trouble due to a car loan, there is not much you can do by worrying. It is time to find a solution and get done with the debt. Some common solutions to this issue are:

  • To pay off your car loan, debt consolidation options by borrowing a personal loan are one of the options. You can save yourself a good amount by borrowing a low-interest personal loan.
  • Loan refinancing options are offered by lenders and car dealerships that will help you deal with bad credit. Considering factors like your credit score and debt-to-income ratio, car finance loan options will open for you to get lower monthly installments. 
  • Consider options like selling your vehicle if it suits you and you are not supposed to pay a major extra cost. 
  • A debt relief solution like a consumer proposal can help you manage bad debt. Your unsecured loans will be lowered which will allow you to fulfill important financial commitments. 


In the previous sections of this article, we have helped you identify the common mistakes to avoid when borrowing a car loan and how you can get help in case of a bad debt situation. Maybe you have borrowed a loan to buy a car or you are looking forward to getting one. Before a loan agreement is signed by you, must make sure that the terms and conditions of the loan suit you and that you will actually be able to repay the amount that you get. In case you end up in a bad debt situation because of a car loan, you will need to find the right debt relief solution. We hope this article would have helped you identify how you can solve this financial issue easily without losing your assets. 


If you borrow a car loan to buy a car, there are chances of falling into a debt trap. There are ways to avoid some common mistakes and also debt relief solutions that can help. In this section, we have answered a few questions related to car loan debt, to help you solve your financial issues in the best possible way. 

What are the disadvantages of a car loan?

Some disadvantages of borrowing a loan to finance your new car are:

  • The monthly installments that you have to pay will add more burden to your expenses
  • If your credit scores are not very good, you might be charged a high-interest rate by your lender or car dealership. 
  • Not being able to repay the loan might lead to your credit scores dropping lower. 

Can a car loan hurt your credit?

Yes, a car loan can hurt your credit. Late or missed payments of your monthly installments can negatively affect your credit score and credit report.

What happens to a car loan in a consumer proposal?

Your assets like your car or your home will not be lost in the case of a consumer proposal. You will be able to keep your assets. A car loan is also not included in a consumer proposal. 

Can a car loan be included in a consumer proposal?

Your secured loans like a mortgage or car loan that you intend to keep will not be included in a consumer proposal.

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