From time to time, people may struggle paying their bills on time. If you're one of them, you may be considering making partial payments, thinking that paying some money is better than none, even if it’s less than the minimum due.
Though partial payments can help reduce the interest accrual on your debt, lenders typically don’t count them as on-time payments and may still consider your account in default.If you make partial payments, here’s what you can expect to happen—and what you can do instead.
Key Takeaways
- Partial payments may not satisfy your creditors' minimum payment requirements.
- Your accounts can be reported as past due to the credit bureaus, causing a drop in your credit score.
- Rather than make partial payments, you may be able to negotiate an alternative plan with your creditor.
- You must also be mindful of how partial payments are applied as there are financial implications to debt being applied to principal as opposed to interest.
What Happens When You Make Only Partial Payments?
In most cases, paying less than the minimum amount due on a credit card or loan won’t satisfy your creditors, and they will still consider it a missed payment. You could face financial repercussions until you pay the remaining amount which may include late fees. Because your payment history makes up 35% of your FICO credit score, your score will drop.
Creditors can also seek other means to get the money you owe them.Here’s what happens with different forms of debt when you make only partial payments.
Credit Cards
Unless you’ve reached a prior agreement with the credit card company, partial payments will not satisfy your account’s minimum payment requirements. Even if you pay a little money, your account will become delinquent, and the credit card company will report the late payments to the credit bureaus. They may also charge you late fees, send your debt to a collection agency, and even sue you if you don’t catch up.
It's important to define what a partial payment means here. Credit card debt balances often come with a monthly minimum payment amount. For example, although you have credit card debt of $1,000 for the month, your minimum payment may only be $25.
Credit card holders may choose to not pay off their balance at the end of each month (i.e. they don't pay off the full $1,000). However, it is part of your credit card agreement that you will at least make the minimum payments (in this case, $25). If you don't make that full minimum payment and only pay $10, you account is now technically delinquent.
Auto Loans
What happens to your auto loan depends on your relationship with the lender. If you’ve never missed a payment before, it may be willing to accept a partial payment for now; however, your loan is typically considered delinquent when you are 30 days past due. If you do not catch up on payments, a delinquent loan will eventually be considered in default. Once you default on a loan, the lender can repossess your vehicle.
The lender can sell your vehicle at auction as they are entitled to recovering their losses by using the car as a security. In some cases, you’ll may owe money on the loan even after your car is repossessed and sold if the vehicle does not sell for as much as your debt amount.
Mortgages
If you can’t afford your full mortgage payment and only pay a reduced amount, your lender may start the foreclosure process. However, that typically doesn’t begin until 120 days after you get behind on your mortgage. You can fix the situation by paying the past-due amount before the lender starts foreclosure.
Student Loans
If you have student loans, making partial payments won’t stop your account from becoming delinquent or defaulting.
If you have a federal student loan, it enters default when you miss your full payments for 270 days. The default is reported to the credit bureaus, and the government has the authority to garnish your wages. Additionally, it can keep your tax refund as payment.
Private student loans work differently from federal loans, with the rules largely at the lender's discretion. Loans typically are considered delinquent as soon as you miss a single payment or only pay a portion of the amount owed. Most lenders will wait 90 days before putting a loan into default. However, some may do so immediately after the first late payment. When you’re in default, private lenders can send your debt to collections and sue you for what you owe.
IRS Tax Liability
The IRS encourages individuals to pay as much as possible to reduce the accrual of interest on your account. This is because if you're not able to pay what you owe, your balance due is subject to interest and a monthly late penalty fee.
The IRS is also amicable to setting up partial payment plans. The IRS may agree to a partial payment installment agreement (PPIA). Note that for those owing $50,000 or less the maximum length of a payment plan is 72 months. Those owing more have a much shorter period to pay.
What to Do If You Can’t Afford Your Payments
If you can't afford to make full payments, these steps can help keep your accounts from becoming delinquent or entering default:
1. Contact the Lender
Once you realize you’ll miss a payment, reach out to your creditors. Some lenders and credit card companies offer financial hardship programs. You may be able to enter into forbearance and postpone your payments for a few months or qualify for temporary interest-only payments.
For example, Discover has a payment assistance program for its credit card holders and personal loan borrowers. If you lose your job, experience an illness, or have another financial emergency, the company can help you identify different payment options or postpone your payments.
2. Ask About Alternative Payment Plans
Even if you don't qualify for a hardship program, it's worth asking your creditors if they offer alternative payment plans that would make it easier to keep up with your bills.
For example, federal student loan borrowers can apply for an income-driven repayment (IDR) plan. When you enroll in an IDR plan, your loan term is extended, and your monthly payment is set at a percentage of your discretionary income. Some borrowers even qualify for $0 payments, so they pay nothing and stay current on their loans.
IDR plans effectively allow you to make partial payments, but you must be approved for the plan before you start making them.
An IDR plan is generally 20 to 25 years for long-term forgiveness. A long time spent here can really push your balances up if you're not seeking this long-term forgiveness because a few of the plans have negative amortization. You might consider a partial hardship consideration but not a long-term plan if your goal is to pay off the debt efficiently.
3. Consolidate Your Debt
When your monthly payments are unaffordably high, debt consolidation can give you some relief. What you do is take out a personal loan at a bank or other reputable lender and use it to pay off your credit cards and other debts. Now you have just one loan to pay back. This reduces the number of debts you have incurring interest, effectively lowering the amount of combined interest you're paying. It's also quite common to have a lower interest rate than your previous debt. You may also be able to extend the term of your loan, further reducing your monthly costs (but possibly increasing the amount you'll pay in the long run because of the added interest).
If your credit score has dropped because of recent financial issues, adding a cosigner to your application can boost your chances of qualifying for a loan at a reasonable rate. You can also find lenders who assume your debt by consolidating your debts into one loan, similar to taking out a personal loan to pay off your debts.
As a last resort, consider prioritizing secured debt (like a car loan) over unsecured debt (like most credit cards).
4. Be Strategic
If you run out of other options, you'll need to prioritize which payments to make, both for debts and other expenses. Generally, you should pay for the essentials first, such as your rent or mortgage, utility bills, and food.
Next, pay any secured debts, such as an auto loan, because you can lose the assets that serve as collateral for them if you fall behind. Student loans and most credit cards are unsecured debts and tend to have the longest periods before defaulting, so it makes sense to pay them last if you are forced to choose.
Advantages of Partial Payments
If you're only able to make partial payments, there are still some silver linings worth thinking about.
First, consistent partial payments demonstrate a committed attempt to meeting your financial obligations. If nothing else, it shows your debtors you still intend to make payments towards your debts.
Second, by making partial payments, you may be able to eliminate or reduce penalties and interest that will accrue when payments are late. Late fees can compound and significantly increase the overall cost of the debt. Some types of interest may also capitalize, meaning interest gets assessed on unpaid interest. Credit card companies routinely access higher penalty rates when you miss a payment. Making partial payments can cut into the late fees and interest that you owe.
Third, for certain types of assets, you may be able to still slowly accumulate an equity balance. This equity balance can be a useful resource, even if it doesn't grow as quickly as it could. Your equity has a positive impact on your net worth, and you'll may still be increasing your financial value with partial payments.
Last but not least, making partial payments can make debt feel more manageable. Instead of having all of that accumulated debt still due in the future, there's a psychological angle to having a smaller amount due in the future. Just be mindful that crossing this mental hurdle may not always be met with tremendous financial benefits.
Does a Partial Payment Affect Your Credit Score?
A partial payment can affect your credit score because a lender will most likely regard it as a missed or late payment if it's below the minimum payment amount. This could lead to marking your account delinquent or in default, which adversely impacts your credit score.
Is It Better to Settle a Debt or Pay in Full?
It is always better to pay your debt in full. Settling your debt is a better option than not paying it; however, settling your debt will give it a "settled" status on your credit report, which will affect it negatively. However, this status is not as negative as not paying your debt.
Can Finance Companies Refuse Partial Payments?
Yes, creditors can refuse partial payments because they're not considered to be full payments. This allows creditors to legally charge late fees, add interest, and mark your account as delinquent or in default.
The Bottom Line
Making partial payments on your bills may help reduce the interest you accrue on them; however, partial payments may not be enough to keep your accounts from defaulting or adversely impacting your credit score.
Instead of making partial payments, you can contact the lender to come to an arrangement, such as deferred payments or lower payments, consolidate your debt, or be strategic about which payments you should focus on.
