In March 2022, consumer proposals rose by 23.7 percent from April 2022.
While a consumer proposal can make insurmountable debts more manageable, it can complicate things if you’re looking for a loan. But even so, here’s the good news:
Getting car financing isn’t impossible if you’re in the market for a new vehicle.
Keep reading to find out what a consumer proposal might mean for your next car loan.
What Consumer Proposals Mean for Your Finances
Between credit cards, lines of credit, and general paycheck-to-paycheck living, many Canadians are a few bad weeks away from becoming insolvent. If you’re in a situation where you’re unable to pay off extremely high debts, a consumer proposal can reduce the immediate financial pressure in two primary ways:
Creditors can either accept a fraction of the debt as repayment or they can extend the payback period. Some proposals may even allow for both.
Although this is fantastic for your monthly budget, this can have credit-affecting consequences. For credit bureaus and lenders, bankruptcies and consumer proposals are an admission that you couldn’t repay your debts in full.
To make matters worse, consumer proposals fall under the “negative credit information” category. As a result, they can stay on your credit report for years.
Why Lenders Don't Want to Finance Consumer Proposal Auto Loans
Because consumer proposals are essentially a person’s way of saying, “I’m agreeing to repay what I can.”, you might be wondering why these agreements make it hard to land car loans. In our experience, lender reluctance around auto loans comes down to three reasons:
1. The Consumer Proposal Represents Increased Risk
Consumer proposals revolve around getting creditors to accept less payment or an extended repayment time. But for lenders, a successful loan is one that’s paid back in full and within the initial repayment period.
They’re not being sticklers — their business model depends on having more money to loan other people. Even if your consumer proposal is the result of bad financial luck, it still represents an increased level of risk for lenders.
In addition, to the red flag around past credit management, consumer proposals also make lenders wonder about your overall financial habits.
After all, if someone has already been insolvent, what’s to stop them from taking out a loan and declaring bankruptcy again in a few years?
Calgary CTV News reported in 2022 that many Albertans were making minimum credit card payments or paying bills after their due dates. If given a chance to snowball, these financial practices can end in financial insolvencies.
For many lenders, higher interest rates might not be enough to offset this level of increased risk. As a result, many mainstream auto loan lenders may be unwilling to extend credit to someone who is currently or recently out of a consumer proposal.
2. Consumer Proposals Come With Lower Credit Scores
In a perfect world, everyone would be a card-carrying member of the 800 Credit Score Club. But in reality, lenders are generally okay with giving credit to anyone with an “okay” credit score. In our experience, this will generally be in the high 600s to low 700s.
Lenders rely on your credit score to assess their odds of being paid back. To them, a strong credit score says, “I am reliable. I always make my payments on time. And I have been doing this for years.”.
The problem with consumer proposals is that they stay on your credit report for years at a time. To top it off, in many cases people who are pursuing consumer proposals are going into the transaction with less-than-stellar credit.
When lenders and car loan underwriters add up the numbers, the lower credit scores associated with consumer proposals can be enough to make them pass on an auto loan application.
3. Borrowing Amount
In 2021, the average price of a new vehicle shot up to over $50,000. And even if you’re not shopping for a brand-new luxury car, the average price of a used vehicle came out to over $40,000 in 2020.
Next to your house, your vehicle is probably the most expensive asset you’ll own. And from a lender’s perspective, that $40,000 to $50,000 price tag represents a significant amount of money.
Or to put it another way, the potential losses involved if the loan isn’t repaid are significantly larger than if you were applying for a smaller loan.
The combination of a consumer proposal and a larger loan amount can be enough to make lenders turn down an application.
Can You Get Car Financing During or After a Consumer Proposal?
Believe it or not, the answer is “Yes!”. But you don’t want to overlook the fact that a consumer proposal has a lot in common with trying to get a car loan after declaring bankruptcy.
You may be able to afford it. And you may even be able to find a lender who offers a reasonable rate. But landing that car loan may require a little more work.
How to Qualify for a Consumer Proposal Auto Loan
Let’s assume you’ve decided to push forward with your car loan application. Maybe you need a new car for work. Perhaps the cost of repairing your current vehicle would be more than the cost of buying a new one.
Here’s how you can get a car loan even if you’ve got a consumer proposal on your credit report:
1. Have a Stable Source of Income
Lenders get concerned about consumer proposals for exactly one reason:
They don’t like risk.
Imagine you’ve got two friends who are looking to borrow money. Both of them have so-so credit and they need cash to keep them afloat for the next couple of weeks. However, one of them has a steady job while the other one has been doing one-off gigs for the past few years.
Even if both of them are struggling financially, the friend with the steady job at least has some money coming in. When push comes to shove, at least you know that Friend A’s cash flow will give them enough purchasing power to pay you back eventually over time.
Car loan lenders will often be performing a similar type of analysis on borrowers.
When you take out a substantial loan, lenders don’t want to have lingering questions in their minds about whether or not you can pay them off at all. If you’re working at a standard job, then at least there’s a paycheck for you to work within.
If you’re self-employed without steady month-to-month contracts, your income might look unstable. If you’re paid on commission or you’re otherwise making money primarily through side hustles and random projects, that may also make lenders nervous.
For this reason, if you need a car for work purposes or to handle commutes, you’ll want to make sure you have a job or a steady income source before you start making loan applications.
2. Show You're Making Progress on Your Payments
As far as your consumer proposal goes, what’s done is done. You don’t want to spend too much time beating yourself up over all the ways that the situation could have been avoided. Even with a consumer proposal showing up in your recent credit history, there’s an easy way for you to make the most out of the situation:
Don’t fall behind on your consumer proposal payments.
Imagine being a lender and talking to a borrower who’s opted for a consumer proposal. You could be willing to lend a hand and make an exception. This person seems to be turning their life around.
But when you get in touch with the financial counselor or you request to see how the consumer proposal has been going, there are multiple missed payments.
How much confidence do you have in this borrower’s ability to pay you back?
No matter what lender you ultimately borrow from, it’s important to understand that the consumer proposal will make it harder for you to secure a loan. Keeping up with your monthly payment schedule and being able to show lenders that you’ve paid some or all of that debt off can make a major difference to your car financing outcomes.
3. Have Low Current Debts
In the second quarter of 2022, Canadian household debt went up to $1.82 for every $1 of disposable income that people had. For many, this number isn’t anything that can’t be handled with a tight food budget and spending a few nights in. However, it does point very strongly to a situation where many households can’t take on more debts than they currently have.
But don’t just take our word for it.
According to Reuters, the average Canadian household debt-to-income ratio reached a new record high in 2022.
As someone who is either in or coming out of a consumer proposal, it’s important to show lenders that you’re not in a situation where every spare dollar is going towards repaying debt. And the best way to do that is to make sure that your debt-to-income ratio is as low as possible.
If you’ve got credit card debts or personal lines of credit that are still being repaid, you might want to spend a few months buckling down and tackling the outstanding balance. This is a move that’ll help you with both your car loan application and your overall finances.
4. Get a Private Loan
So after all is said and done, many mainstream lenders will still decide against approving your auto loan application. After all, when you’ve got shareholders to satisfy and a bunch of government regulations to follow, there’s only so much risk you can afford to take on.
Fortunately, there’s another way to secure a car loan even with a consumer proposal and a less-than-stellar credit report:
You can find a private lender.
No, this doesn’t have to look like borrowing from friends and family. Many private loan companies are prepared to consider a series of factors that have nothing to do with your credit.
Think about it.
We’ve already talked about how debt and financial strain are common issues for Canadian households. There are tons of people who wracked up high credit debts a few years ago but who have turned things around in more recent years. By the numbers alone, many mainstream lenders are leaving a lot of money on the table.
After all, having insolvency on your credit report doesn’t mean that you’re completely unable to pay your current debts. Private lenders understand this and are often willing to offer car financing loans in situations where banks and credit unions would pass.
However, even if lenders are willing to overlook low credit or a consumer proposal, that doesn’t mean that it’s a free-for-all. You’ll still need financial stability, low debts, and a healthy amount of cash.
But if you’re unable to secure financing through traditional lenders, private auto loans could be the answer to your problems.
5. Considering Downgrading Your Vehicle Preferences
Sometimes desired vehicle specifications can’t be helped. If you work in construction, for instance, a tiny two-person vehicle can’t transport equipment and materials the way a full-sized pickup truck can.
We get it.
But if there are ways to lower your requested borrowing amount, that can only help your application for car financing.
For instance, maybe instead of a brand-new car, you can buy a vehicle that’s a few years old but still in solid condition. Instead of purchasing all the upgrades, you can opt for the basic safety package.
A few decisions of this nature could save you thousands of dollars. And lenders who might have balked at the thought of backing a $50,000 purchase might be more comfortable with a $10,000 or $20,000 loan.
Do You Need a Consumer Proposal Auto Loan?
From unexpected debts to being stuck between jobs, bad luck happens to the best of us. Having a consumer proposal on your credit report, however, can make it a lot harder to land a car loan.
If you’re buying a car and you need auto loan financing, we can help. We approve all kinds of credit — including for Canadians who have consumer proposals. Get approved within minutes today!