I spent Sunday afternoon at a used car dealership in Scarborough with Sam, a 32-year-old warehouse supervisor trying to escape his auto loan nightmare. He’d purchased a crossover SUV three years ago on an 84-month financing plan. The payments were manageable then—barely—but interest rate hikes have since turned his budget upside down.
“I’m paying more for this car than my groceries and utilities combined,” he told me, nervously eyeing the trade-in manager’s office. “But they’re saying I’m underwater by almost $8,000. I can’t even sell the thing without coming up with cash I don’t have.”
Sam isn’t alone. Across Canada, a brewing crisis of automobile debt has accelerated as interest rates climbed and inflation squeezed household budgets. Licensed insolvency trustees report surging numbers of Canadians seeking help with unmanageable car loans, often discovering they owe far more than their vehicles are worth.
“We’ve seen a 40% increase in clients specifically mentioning auto loans as a primary reason for seeking debt help,” explains Rebecca Martyn, Licensed Insolvency Trustee at Hoyes, Michalos & Associates. “What’s particularly concerning is how many of these loans were approved despite clear affordability issues.”
The numbers paint a troubling picture. The average new car loan in Canada now stretches beyond 72 months, with many extending to 84 or even 96 months. According to Equifax Canada, the average new vehicle loan amount hit $62,000 in late 2023, a 13.9% increase from the previous year.
More alarming is how these loans are structured. Negative equity—when borrowers owe more than their vehicle is worth—has become normalized rather than exceptional. J.D. Power Canada estimates that 33% of trade-ins now involve negative equity, with an average underwater amount of $7,800 being rolled into new loans.
“We call it the debt treadmill,” says Daniel Teo, a financial counsellor with Credit Canada. “Consumers trade in underwater vehicles, roll the negative equity into even longer loans on new vehicles, and end up deeper in debt with each cycle. The payment seems manageable, but they’re financing yesterday’s vehicle alongside today’s.”
This crisis didn’t materialize overnight. Extended loan terms became increasingly common after the 2008 financial crisis as a way to keep monthly payments low while vehicle prices climbed. What began as a temporary market accommodation evolved into an industry standard, with 84-month loans becoming commonplace despite financial experts’ warnings.
The pandemic further complicated matters. Supply chain disruptions pushed new and used vehicle prices to record highs just as interest rates remained at historic lows. Many Canadians locked in vehicle purchases with little negotiation leverage but manageable financing costs.
Then came inflation and the Bank of Canada’s aggressive interest rate response.
“What we’re seeing now is the perfect storm,” notes Lesley-Anne Scorgie, founder of MeVest financial coaching. “Many variable-rate loans have seen monthly payments jump by 30% or more. Even those with fixed rates face sticker shock when refinancing or purchasing replacement vehicles.”
The consequences extend beyond individual financial hardship. Auto loan delinquencies reached 2.73% in the third quarter of 2023, according to TransUnion Canada—the highest level since 2009. Voluntary repossessions have increased by 26% year-over-year, industry sources confirm, as owners simply can no longer manage payments.
For those trapped in problematic car loans, options exist but remain limited and often painful. Some lenders offer refinancing, but with higher interest rates and extended terms that may provide short-term payment relief while increasing long-term costs. Others may permit loan modifications for borrowers experiencing temporary financial setbacks.
However, for many, the solution ultimately involves downsizing to less expensive transportation—if they can overcome the negative equity hurdle.
“We’re having difficult conversations with clients about selling privately rather than trading in, even if it means taking a personal loan to cover the shortfall,” explains Kurt Magnus, a debt counsellor in Calgary. “Sometimes we have to discuss bankruptcy or consumer proposals when the transportation burden becomes insurmountable alongside other debts.”
The situation has caught regulatory attention. The Financial Consumer Agency of Canada issued warnings about extended-term auto loans, noting they often lead to persistent debt cycles. Several provinces have strengthened disclosure requirements for dealerships, but critics argue these measures address transparency rather than affordability fundamentals.
Industry defenders note that longer-term financing has made vehicle ownership possible for many Canadians who otherwise couldn’t afford reliable transportation. In a country where public transit options remain limited outside major urban centers, personal vehicles often represent necessity rather than luxury.
“There’s legitimate consumer demand driving these financing structures,” argues Paul Antunes, an automotive industry consultant. “The average new vehicle now costs over $66,000. Without extended terms, many Canadians simply couldn’t purchase what they need for work and family.”
However, consumer advocates counter that the industry has normalized unsustainable financing practices that prioritize moving inventory over financial wellness.
“When you’re financing a depreciating asset for seven or eight years, you’re setting up for failure,” says financial educator Kerry Taylor. “The math simply doesn’t work, especially when interest rates rise or economic circumstances change.”
For those currently struggling with auto loans, experts recommend several approaches:
Contact lenders proactively if payments become unmanageable, as many have hardship programs
Consider selling privately rather than trading in to maximize value
Explore refinancing only if it reduces interest rates without extending terms significantly
Meet with a non-profit credit counsellor to evaluate all debt obligations holistically
Research public transportation options, car sharing, or less expensive vehicles
Back at the dealership, Sam ultimately left without a solution. The numbers simply didn’t work—his negative equity combined with higher interest rates meant any replacement vehicle would strain his budget even further.
“Maybe I’ll just drive it until it dies,” he sighed as we walked to the parking lot. “At least then I’ll finally be even.”
For millions of Canadians similarly trapped in vehicle debt, that sentiment hits uncomfortably close to home.
