What Happens If You Make Partial Payments?

As helpful and convenient as some credit products are, they can make it easy to rack up debt. This is particularly problematic with high-interest credit products, like credit cards, personal loans, and even car loans. Unfortunately, when coupled with your other daily and unexpected expenses, those kinds of debts can be difficult to pay down, at least in full amounts.

When that happens, it can be tempting to make partial payments just to avoid penalties. Then again, there are other consequences that may occur if you don’t pay your bills in full. Keep reading to find what happens if you make partial payments.

Check out how to avoid high-interest loans.

Partial Payments vs. Late Payments

In Canada, it can be tough to find a credit product that doesn’t result in some kind of penalty when you don’t pay your debts in full and on time. That said, there are a couple of key differences between making partial payments and late payments:

Partial Payments – As the name suggests, a partial payment is when you don’t pay a bill off completely. Instead, your lender may allow you to make part of your payment, provided you agree to pay the rest of your debt off at a later date. These payments are commonly seen with revolving credit products, like credit cards and lines of credit but can be an option with other types of debt.

Late Payments – Unlike partial payments, most lenders aren’t as forgiving when you don’t pay your debts on time. Even if you pay a day or two later, you could be charged a penalty, as well as extra interest. While some credit products have grace periods where only small penalties will apply, too many late payments can result in more serious financial consequences than partial payments.

Learn more about what happens when you miss your loan payments.

Consequences of Making Partial Payments

Debt doesn’t just apply to credit products. Plenty of financial products and services can involve payments. For example, utility providers set their own penalties for customers that don’t pay as agreed, just like a bank, credit card company or an alternative lender.

Here are some other common products that could have various consequences when you make partial payments:

Mortgage Payments

Your mortgage is one scenario where it’s a really bad idea to stray from your agreement. Although some lenders will tolerate it under exceptional circumstances (like COVID-19), most will apply a hefty penalty to your final loan balance. Generally, the amount you have to pay is based on how many days late or how short the payment is.

Additionally, this could happen if you cannot make a full mortgage payment:

Late Fees – Most of the time, your lender will consider a partial payment “late”, even if it’s only a few dollars short. Afterward, they may charge you a penalty fee and extra interest. While these fees might not seem like much at first, they can quickly add up and significantly increase your total mortgage balance.

Less Creditworthiness – Next, most lenders will report your late payments to Canada’s credit bureaus, which can decrease your credit score. They will also appear on your credit report for several years and can be seen by other potential lenders, who may not approve you for new credit products or good interest rates.

Loss of Asset/Foreclosure – Since mortgages are large, risky loans, they’re normally secured against your property or another asset of similar value. Be careful, because if you can’t justify your late payments, many lenders will consider foreclosing your home or seizing your asset after 90 – 120 days.

Check out how additional mortgage payments can lead to a prepayment penalty.

Credit Cards

Credit cards are one of the few products that allow partial payments without penalty, provided you pay at least the minimum amount on your monthly balance statements. However, there are consequences for paying under the minimum or making too many partial payments, such as:

Late Fees & Interest – Like most credit products, failing to cover your minimum monthly credit card balance can lead to a penalty fee and additional interest. Although credit card late fees may not be too steep, the interest that’s applied to your unpaid balances can get very expensive, very quick.

Faster Decline in Creditworthiness – If your lender reports to Equifax and/or TransUnion, any late payments will end up on your credit report for multiple years. Plus, carrying large amounts of unpaid debt on your card can gradually cause a decline in your credit score and make you less creditworthy.

Account Charge-Off & Debt Collection – After 180 days of late payments, most lenders will deactivate your account and sell it to a collection agency. Not only could this leave you with a lack of credit, but the debt collection procedures can also be followed by lawsuits, wage garnishment and other legal consequences.

Struggling to pay off your maxed out credit cards?

Personal Loans

No matter the size of your personal loan, your lender can still subject you to some severe penalties when you don’t make full payments, like:

Late Fees & Interest – Since most lenders don’t accept partial payments, some personal loans involve much higher late fees and interest rates for late payments than many credit cards do.

Credit Damage – It can be hard to find a good lender that doesn’t report loan activity to at least one credit bureau. So, when you’re late on too many payments, your credit report, credit score, and creditworthiness can suffer greatly.

Charge-Off & Collections – Your lender decides how long it will be before your personal loan account is charged off and sold to a collection agency. If you have a large loan debt, the agency could be even more inclined to take you to court.

Car Loans

Any type of vehicle loan can also involve a lot of risk for the lender and some major consequences can apply when you try to make a partial payment, like:

Late Fees & Interest – Car loans are no exception to the late payment rule, whether you’re financing your vehicle through a bank, alternative lender or dealership. This is especially true for newer and more valuable models.

Credit Damage – Many car loan providers also report to Equifax and/or TransUnion. So, if you don’t make full payments, you may see a big drop in your credit score, along with all the typical damage to your credit report.

Collections & Repossession – Similar debt collection penalties can apply when you default on an auto loan. Plus, your loan may be secured against the car, so your lender will have the right to repossess it if you miss too many payments.

Tax Debt

Unlike the everyday credit product, your income tax debts are handled by the Canada Revenue Agency. As such, more serious legal and financial consequences can apply if you don’t make full, timely payments, including but not restricted to:

Late Fees & Interest – When you don’t pay your taxes, the first thing the CRA will do is charge you a penalty. This fee usually amounts to 5% of your debt, plus an extra 1% of your balance owing for every month that passes without payment.

Wage/Income Garnishment – If you fail to pay your income taxes without an explanation, the CRA will take legal action. This often results in them being able to periodically deduct a portion of your debt from your income or bank account.

Loss of Assets – If your tax debt is large enough and your income is insufficient, the CRA may collect payment by seizing and selling your assets. This can lead to the repossession of your car or, in the worst of cases, foreclosure of your home.

Thankfully, if you provide a viable explanation for why you can’t report your taxes on time and arrange to pay the rest of your debt off in installments, the CRA may allow you to make a partial payment. For this to work, you’ll have to prove that you already tried to cover your debt by borrowing money or decreasing your expenses.

Government Student Loan Debt

There are several credit products that you can qualify for as a student, such as a guaranteed loan from the federal or provincial/territorial government. Sadly, if you don’t pay as agreed, this kind of loan can also lead to severe drawbacks, such as:

Penalties & Collections – It takes about 270 days of missed payments for the government to send your defaulted account to the CRA for debt collection. Once that happens, they can withhold your tax refund and use it to repay your debt.

Legal & Financial Actions – The CRA also has the ability to file a lawsuit against you, freeze your bank account and garnish your income until your full balance owing (plus interest and fees) is repaid.

Reduced Creditworthiness – Like other credit products, government student loans generally get reported to Canada’s credit bureaus. So, if you have any unpaid debt, it can damage your credit history, rating, and score.

Although these consequences are serious, the government might be understanding if you have a valid reason for making a partial payment. You may be able to negotiate for a more affordable repayment plan or qualify for the government’s Repayment Assistance Plan (RAP). If necessary, you can also speak to a Licensed Insolvency Trustee about debt forgiveness programs, like a consumer proposal or bankruptcy.

Additional Reading

What Should You do if You Can’t Make a Full Payment?

If you’re only able to make a partial payment this month, there are a few different options that can help you out of a jam, including but not limited to:

Speak to Your Creditor/Institution – If your credit source is open to negotiation, the simplest solution may be to ask them about deferring your payments or readjusting your payment plan. This can at least spare you from late penalties.

Check if There’s a “Skip Payment” Option – Depending on what kind of contract you have, your lender may allow you to miss one or two payments, as long as you pay them and any interest by the end of your term.

Refinance – Common with mortgages, some lenders permit you to refinance your loan before its final due date. This can lead to a repayment term, lower installments and, in some cases, a better interest rate.

Balance Transfer – Some revolving credit products allow you to make free or low-cost balance transfers (your unpaid debt gets transferred to a new product with better conditions). This is a great solution for credit cards and lines of credit.

Find a Credit Counsellor – These debt specialists can give you advice and help you access more effective solutions, like debt management programs, consumer proposals, and bankruptcies. If you’re lucky, they may also be non-profit.

Frequently Asked Questions

Do partial payments affect your credit score?

Remember, if your lender reports your payments to either credit bureau, they can affect your credit score. The overall effect depends on what credit product you’re using:

Credit Utilization – With a revolving product, like a credit card or line of credit, your credit utilization ratio will increase with every unpaid dollar. The more of your available credit you use and the longer you go without paying your full debt, the further your credit score can decrease.

Late Payments – If you have a loan or other credit product that involves fixed payment amounts, you’ll most likely be charged a late penalty and extra interest if you don’t pay as agreed. Additionally, every defaulted payment decreases your credit score and stays on your credit report for several years.

Can I pay off my debt using partial payments?

In some cases, yes. As mentioned, partial payments may be possible with revolving credit products, like credit cards and lines of credit, which don’t result in a penalty, as long as you pay at least your designated minimum monthly balance amount. Some government entities may also allow you to pay your debt off through installments.

Is a partial payment considered a late payment?

Unfortunately, when it comes to fixed credit products, like loans, partial payments are usually not accepted. If you don’t pay as agreed, most lenders will simply consider your payment late and charge you for it. While you might be able to negotiate or refinance to obtain a better repayment plan, you may still be subject to various penalties.

Thinking About Making a Partial Payment?

Before you do, make sure to find out about the potential consequences, since they can do significant harm to your credit and finances when you’re not careful. After all, while a full payment might not seem affordable at first, the penalties and interest that gets added to your unpaid debt may not be worth the trouble.

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Bryan Daly

Bryan is a graduate of Dawson College and Concordia University. He has been writing for Loans Canada for five years, covering all things related to personal finance, and aims to pursue the craft of professional writing for many years to come. In his spare time, he maintains a passion for editing, writing screenplays, staying fit, and traveling the world in search of the coolest sights our planet has to offer. Bryan uses the BMO Cash Back Mastercard to earn cash back on everything from boring bill payments to exciting excursions. He is also a strong saver, holding both a TFSA and an RRSP account in order to prepare for his future while taking full advantage of tax benefits.