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Deferred Payments Can Get You in Hot Water

It’s hard to argue that there aren’t benefits to buying something using deferred payment. As diligent as someone is, get caught off guard and miss a payment or don’t follow the terms though and the benefits quickly dwindle away. Sadly, that’s what happened to Harriet’s daughter. Read along as our expert, Accredited Financial Coach of Canada Sherry, guides her on what to do to resolve the issue.

The Question…

I need some help. My adult daughter, who has a learning disability, bought a mattress using a deferred payment plan. She works full-time and understood pretty well what she had signed up for so did well at keeping up to date on her monthly payments. The thing is, she never received notice that her final payment was due and missed it. When was making her monthly payment she noticed her balance had jumped from $235 to $960. 
Not fully understanding, she continued to make payments and didn’t think to call them or bring it up with us.  When I noticed she was still making payments I asked her about it. She explained what happened and that it was a year ago.
Luckily she’s not behind, but the interest is 30%. When we called the store together they said that they can’t make any adjustments unless she chooses to default.
What do I do?

Harriet K.
Digby, NS

The Answer…

I am so sorry to hear that this is happening to your daughter. It sounds like she’s been keeping her cash flow in check and handling those monthly payments, which is great. Kudos to her! But then, bam, one misstep, and she is left with a big jump in her balance! And that interest rate?! Thirty percent interest is so challenging to get out from under! 

You didn’t say this, but the interest rate likely increased when her final payment was missed. This means that now, her monthly payment is going towards big interest charges. This is likely making it hard for her to pay down her principal balance. It’s important to know that in many buy now, pay later situations, the terms and conditions of the contracts can often lead to future problems. If anything goes wrong with missing any payment terms, you can get into a challenging position.

The fine print in deferred payment agreements can lead borrowers to sticky situations like the one your daughter is currently in. With agreements like this on the rise for Canadians, it’s important to understand what they are. And to know what options are available when you may miss a minimum payment or do something else that gets you stuck in a high-interest rate loan. 

I’m happy that you are in your daughter’s corner and helping her look into this and advocate for herself. The response from the store is so frustrating! Because defaulting opens up a lot of other concerns and things that need to be dealt with in the future. This can add a lot of stress down the road. We should only consider this option as a last resort.

First things first

let’s talk about deferral. Deferred payment plans can be a lifesaver.  But sometimes, they come back to bite us. They often have us feeling short-term gain but long-term pain. Deferring payment on something we get to take home today can have us signing before we know the full commitment. Missing that final payment can cause a big headache and add a lot to the cost of borrowing. It does happen to the best of us, and I suspect that is what your daughter has experienced. It’s important for your daughter to understand the risks of any deferred payment plan.

I recommend going through all the paperwork for this deferred payment plan. Look for any details about what will happen if there are any missed payments and details around if funds are not repaid within the loan terms. For deferred payment plans that have no or low-interest rate, if the funds are not repaid in full by a specific date, interest is then charged for the whole term of the loan. One financial hiccup or curve ball can end up costing a lot in these cases.

Now, let’s talk strategy and next steps

Can we negotiate a lower interest rate? Can we work out a payment plan that won’t leave your daughter feeling like she will be paying this off forever? And most importantly, how can we help your daughter avoid this in the future?

Did you find red flags while reviewing the paperwork for this payment plan? Or anything that indicated that the lender is not following the contract? If you did, this is the first thing to address with them. If you didn’t, there are still options. I’m not super hopeful, based on the initial response you got though. But you and your daughter can contact the lender again and see if they are willing to negotiate with you and lower the interest rate. 

If you get a no on lowering the interest rate, it’s time to cut ties with this lender so they are out of your daughter’s life. A key factor when looking into these options is the contract. Does it allow for a lump sum payment option to get out of the contract? Typically, this is something that is allowed. But it’s important to understand the terms and conditions of this specific agreement.

If a lump sum payment will get your daughter out of her contract and out from under the 30% interest rate, the next step is to look at her options. 

  • If you are in a financial situation to help her, you could make the payment and then have her repay you. If this is the path you both choose, I recommend writing up a contract between the two of you with the specifics so it’s still official.
  • If you aren’t able to loan her the money or you want to support her in looking for other options, the first step is to review her credit score and credit report. 

Reviewing credit scores/reports

  • Canadians actually have two credit scores and two credit reports. One with each of the Canadian credit bureaus (Equifax and TransUnion). 
  • Your daughter can check her report and score for free directly from each of the credit bureaus. 
  • Credit scores range from 300 – 900. The higher the credit score, the more options your daughter will have.
  • When reviewing her credit report, she should check for any errors or things that shouldn’t be there. If she finds anything, a dispute can be filed to have corrections made. 

Time to consider your options

If she has a credit score in the higher ranges (above 660), she should have a few options.

Personal loan

Take out a personal loan or a credit line to cover the balance remaining. The best place to start for this option is with her current bank or financial institution. Before officially applying for anything, I would recommend she contact someone to help her explore these options.

Transfer the balance

Because your daughter has a balance she’s looking to pay off, look for credit cards with options to transfer a balance. She may even be able to find a balance transfer option with a period of no interest. It’s important to review the terms and conditions closely though. A few things to look for are balance transfer fees (usually 2-3% of the balance) and situations that would see the interest rate kick in. If she goes for this option, it’s important that she pays her credit card 3-5 days before the due date to make sure the payments have time to clear.

Debt Management Program

The outstanding balance amount your daughter currently owes may not warrant a debt management program. It is still something I wanted to share with you. If the monthly payments on her debts are causing her financial hardship, it is a good option to look into. While your daughter may not be in this position, if you are reading and feel overwhelmed by debt or credit card bills, I encourage you to look into this.

Final thoughts

I’m so glad that your daughter has you by her side to help her through this. Dealing with this on your own can be very stressful. That stress can often lead to making decisions without considering the big picture, which can tend to get you in more hot water. 

Take some time with your daughter to review her credit report, her current situation with her payment deferment plan, and her options. If she doesn’t currently have a budget, this could be a great time to get her started with one. If you don’t feel comfortable helping her with this, you can seek out a credit counsellor to help her out.

Best of luck to you and your daughter with navigating this together.

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