The Government Guarantee Trap: How Advance Payments Program Loans Can Backfire
- Alana Gage
- Jul 1
- 2 min read
To understand why these issues occur, it helps to know what’s going on behind the scenes. These loans are funded by one of the big six banks in Canada, and administered by a service provider, usually an industry association. The loan is guaranteed by the Canadian Government under the Advanced Payments Program legislation, which protects the bank from any losses. This government guarantee affects how the bank manages the loan, which causes significant issues for farmers if they’re not aware of it.
The first impact to a farmer is that any missed payments are treated the same way as missing payments on other loans at a bank. This is considered a default, and could disqualify a farmer from getting any future loans with that bank (or others) until the loan is fully paid off. In most cases, this default gets reported to credit agencies or through the Personal Property Security Act registry, which will make it difficult for the farmer to get a loan from any traditional lender for years into the future.
The second impact to a farmer is that banks often encourage farmers to enter into forbearance agreements on these loans because of the government guarantee. The lender is guaranteed to get paid, so why not maximize the interest revenue in the short term? While this might seem helpful, it can actually hurt the farmer in two ways. First, the loan isn’t fully paid, which means the farmer is disqualified from any additional funding from the Advanced Payments Program until two years after the loan is paid off. Second, forbearance is treated like a bankruptcy, which could keep the farmer from qualifying for new loans for years. The result is two years without the 0% financing available and possibly years without being able to get new loans or restructure debt. In almost all cases, the farmer would have been better off avoiding the default in the first place.
It’s almost never a good idea to default on an Advanced Payments Program loan, even though the consequences might seem small at first. At Glengarry, we’ve seen farmers end up paying effective interest rates of 40% or more because they couldn’t pay off the loan in full. We’ve helped many farmers with this issue, and there’s no need to create future financial problems by defaulting on your Advanced Payments Program loan. Contact us at JGinquiry@glengarry.ca for more information.
