With the holidays quickly approaching and many Canadians feeling the pinch, it is no surprise that
buy now, pay later (BNPL)
plans look especially appealing. These short-term offers can seem like an easy way to stretch a tight budget and keep seasonal spending on track, but without a clear understanding of how they work, they can just as easily create a difficult cycle of debt. Before deciding whether to take advantage of a BNPL plan, here are tips to help you assess the benefits and associated risks.
Different types of BNPL plans
BNPL contracts have been around for decades and come in a variety of forms. They are known by names such as retail financing agreements,
credit card
instalment plans or retail credit services. However, they all provide essentially the same service; they allow you to pay later for your product or service.
The traditional type of deferred payment plan is typically tied to a specific store credit card with a “no payments, no interest” promotion, often for furniture, appliances or electronics. Depending on the offer, you could be required to make payments during the no interest period. However, more often than not, you are allowed to skip payments entirely without triggering interest charges so long as the balance is paid in full before the promotional grace period ends.
Some credit card providers offer instalment plans that let you convert eligible purchases or parts of your balance into a structured loan repaid over a set number of months. While there could be a fee, the interest rate is typically lower than what you would pay by carrying the balance on your card and each instalment is simply added to your minimum monthly payment. However,
could terminate the plan and cause any discounted interest rate to end as well. And because the instalment amount is carried on your credit card, it still counts toward your overall balance and reduces your available credit.
The most popular BNPL option today comes into play right at the checkout, whether you are shopping online or in-person. These payment services typically allow you to split your purchase into three or four equal monthly instalments. To be approved, many providers run a soft credit check, which does not affect your credit score, before asking for your consent to automatically debit your bank account or credit card for the future payments. With a realistic budget there can be benefits to spreading out your payments. The risks, however, are undeniable.
The pros and cons of BNPL payment services
The convenience of using services such as Klarna, Afterpay, Affirm, Sezzle or PayPal Holdings Inc.’s Pay in 4 has grown quickly since the pandemic. By spreading payments out, BNPL plans offer the flexibility to manage large or unexpected expenses more easily, without incurring the same interest charges as you would with a credit card.
BNPL services can also help you plan your spending for upcoming or planned purchases if you create a solid repayment plan beforehand. Without a clear strategy to account for the payments
, it is easy to lose track of multiple plans, each with different terms, conditions and repayment requirements.
BNPL plans are still debt, not free money, and can become a problematic financial habit, especially if you try to maximize
contained within the BNPL services. Payment providers encourage frequent use with rewards and loyalty incentives, offering discounts at retailers who offer their service to their customers. Making payments on time, reaching certain spending targets or engaging with features in their app can lead to additional offers or membership upgrades, establishing a pattern of incentivized spending that some may compare to online gambling.
Before signing up for any plan, it is important to carefully read the fine print, ideally by reviewing the terms on the payment service’s website, rather than making decisions while standing at the checkout counter. This approach gives you time to clarify anything that might be unclear, reconsider your purchase or look into other payment methods because regularly using BNPL plans may hide underlying issues with spending habits and money management. This could lead to missed payments, costly fees, interest charges and
.
Missing payments, especially with 12- to 18-month no payment offers, can be costly because interest is normally charged on the full balance retroactive to the date of purchase. While BNPL may appear simpler than credit cards, credit cards provide consistent billing, better consumer protection and help build credit when used responsibly.
BNPL plans are available for everything from food delivery to fashion and home improvement items, making deferred payments even more attractive. However, returning an item bought with BNPL, and receiving a full refund, generally does not stop the payment plan. As a result, it can be frustrating to continue paying for an item you no longer have.
Using BNPL plans assumes that your income remains stable so that you can make the payments on time. If your income suddenly decreases, you could miss payments and find it challenging to recover financially.
As with any tool, the trick with using BNPL plans wisely is to make sure the payments fit within your budget. Have a plan for how you will finish
, and if you run into trouble, reach out to your financial institution or a non-profit credit counsellor for help before your situation gets worse.
Mary Castillo is a Saskatoon-based credit counsellor at Credit Counselling Society, a non-profit organization that has helped Canadians manage debt since 1996.
