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Buy Now, Pay Later

With inflation and rising interest rates taking its toll, many Canadians are turning to Buy Now Pay Later payment methods. Rapid technological changes are developing new ways to pay for the items you buy. A recent addition to the payment market is the Buy Now, Pay Later (BNPL) option many retailers now offer using financial technology.

If money is tight, it can be a great tool to manage your cash flow or allow you to buy larger items. Using this service might seem like a good idea, but it can be a slippery slope. Here, we’ll take an in-depth look at what Buy Now, Pay Later is, so you can decide if it’s worth considering.

Buy Now, Pay Later (BNPL)

Buy Now, Pay Later is a familiar idea but a modern twist on the old concept of layaway or making purchases in installments. Before consumers had access to credit, they sometimes used a store’s layaway program or retailer’s installment loan program to purchase items they needed or wanted. The store allowed the buyer to pay off the item in installments. 

In some cases, the store kept the merchandise until the buyer paid the amount owed in full. Once it was fully paid for, the item would belong to the purchaser. Using layaway allowed customers the opportunity to buy merchandise over time without having to pay interest.

Once credit cards and department store credit cards became widely available, layaway disappeared from many stores. A similar concept has now emerged with Buy Now, Pay Later.

What is Buy Now, Pay Later?

Buy Now, Pay Later is essentially a form of microfinancing that works as a small loan. You can buy clothing, cosmetics, groceries, appliances, technology and more with BNPL. 

Buy Now, Pay Later is most common with e-commerce, but some brick-and-mortar stores also have it as a payment option.  Using BNPL spreads the cost of your purchase out over several installments.  Installments are usually weekly, bi-weekly or monthly.

There are two types of BNPL plans. One is a deferred payment plan, and the other is an installment plan. 

A deferred payment plan allows you to make no payments until a specific due date. You’ll avoid interest if you pay off your purchase by the due date, but you may have to pay an administration fee. If you don’t pay off the item, the deferred payment plan converts to an installment loan, usually with a high interest rate. Reading the fine print is essential before accepting a deferred payment plan.

A BNPL installment plan doesn’t defer your payments. You make the first payment when you buy the item and pay the administration fee, if there is one. You’ll then have to pay the additional installments over a period of time. Installments are interest-free as long as you make payments when they are due.

Many BNPL plans are short-term, with payments extending over four or six weeks. Some providers allow you more time to pay off your purchase, such as six months or longer. More extended payment plans are usually for more expensive items like appliances.

How does BNPL work?

In Canada, retailers pay fees to partner with six companies that offer BNPL services. They are Klarna, Sezzle, Afterpay, Zip, Affirm and PayBright. If you make a purchase at a participating retailer, you can use the BNPL option by signing up with the provider they offer. 

You make one payment up front and then pay the balance in installments. Generally, you’ll pay 25% of the purchase price at the time of purchase and the 75% owing in three or more interest-free installments.

Companies typically set up BNPL as auto-debits to your bank account or credit card. Younger users tend to use online BNPL providers while older users use their credit cards for payments.

Some retailers will do a soft credit check to qualify you for the program, and a few may do a hard pull on your credit report. BNPL doesn’t affect your credit rating, but it may if you make late payments or miss them altogether.

Who uses BNPL?

People of all ages use BNPL, but the majority of users tend to be younger, in the 18-44 age group. Three main reasons people use the service are:

  •  They don’t have the money for the total purchase price.
  •  They don’t want to pay interest or fees using their credit cards. 
  •  They feel using BNPL helps them budget for their needs and wants.

Why would I use BNPL?

You might use BNPL for several reasons. Inflation and the rising cost of living are putting financial pressure on consumers. You may need things, but you simply don’t have the money to buy them.

Sometimes, these can be unusual expenses like back-to-school items for your kids. Or, you could be in a situation where you cannot manage your regular monthly expenses like groceries, so using BNPL allows you to buy necessary items.

Another reason you might want to use BNPL is there are no interest payments as long as you make your payments on time. Plus, if you’re carrying a balance on your credit card, using BNPL won’t increase your balance.

Using BNPL may help you budget for an expensive item or an unusual expense. You might find it hard to put money aside for a purchase but find it easier to make a few payments.

What are the pros and cons of Buy Now, Pay Later?

Like most products and services, BNPL can benefit you or cause problems for you. The main pros and cons of BNPL are:

Pros Cons
It allows you to purchase things you may need but don’t have the money for. It can lead to overspending if you feel you can manage the payments. Consumers spend up to 45%more with BNPL than they would have if they paid for the whole purchase upfront.
BNPL is interest-free. Fees and interest can apply if you are late with payments or miss payments.
BNPL doesn’t impact your credit rating. If you are late or miss payments, it could be reported to the credit bureau, reducing your credit score.
You can easily budget for the payments since they are scheduled. It could put you in overdraft if you don’t have the money in your bank account. It could also put your credit card over the limit if you don’t have the available room for the payment.
It limits your spending to the items you want to buy. Returning items can be difficult. You may need to keep making payments before you get a refund.
Convenient since payments are debited automatically. If you use BMPL frequently, you might find it hard to keep track of your payments.
It allows you to afford items you want. It may lead you to make unnecessary purchases.

Is Using Buy Now, Pay Later, a Good Idea?

This service can be helpful for you only if you manage it well because it allows you to purchase necessary things even if you’re short on cash. If you make your payments according to the payment schedule, you’ll pay off your purchase quickly and without high interest charges. A short-term, interest-free loan makes more sense financially than using high-interest-rate credit cards or payday loans.

However, Buy Now, Pay Later loans can lead to overspending. You may think you have more money than you do because payments seem manageable. If your payments are late or you miss them, it could lead to fees and surcharges on your account. Late payments can damage your credit rating.

Using BNPL frequently could be a sign that you’re struggling to manage your expenses. If you’re having difficulty covering your monthly costs because of the debt you’re carrying, help is available. Please reach out to Allan Marshall and Associates at 1-888-371-8900 for a free consultation. We’ll work with you to find the best solution for your debts and get you on the path to a debt-free future.

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Mary-Ann Marriott

Mary Ann has been working in the insolvency industry for 25 years. In 2005 Mary Ann received her Chartered Insolvency & Restructuring Professional (CIRP) designation and attained her license as a Licensed Insolvency Trustee (LIT) in 2014. She is passionate about helping others become financially literate, and has been a guest speaker to various groups and organizations on the topic of Money Management. Mary-Ann also hosts a weekly radio show, as a volunteer in her community. Her tagline is “Helping you have happier, healthier finances”.