Considering various payment options to finance purchases might be extra appealing in this costly economy. One such service – buy now, pay later (BNPL) – is becoming available when purchasing anything from online groceries to footwear to inclusive vacations.
And the service is becoming an increasingly popular online and in-store payment option. According to this report, one in five Canadians are aware of, but have not used, BNPL services – but three in ten report they likely will start. BNPL Gross Merchandise Value in Canada is expected to grow steadily.
Although PayBright was Canada’s first BNPL platform in 2017, countless others now offer flexible payment options at checkout. Sezzle (now the highest-rated and most-reviewed BNPL app in Canada) joined in 2019, followed by Affirm in 2021, and Klarna and Apple in 2022.
But as tempting as they are, BNPL payment plans aren’t something you should consider without knowing the risks.
What Are Buy Now, Pay Later Services?
Buy now, pay later (BNPL) is a short-term, interest-free loan that offers consumers the option to pay for a purchase in the future. No credit checks are necessary since withdrawals come directly from your bank account or credit card.
If you opt for a BNPL arrangement during an online checkout, you’ll go to a BNPL site where you add a payment method like your credit card or bank account. The system automatically debits payments on the scheduled date, but you can pay earlier. If you make your payments on time, you usually won’t pay any interest.
BNPL is similar to a layaway plan – with one key difference. Instead of completing all installation payments before receiving an item, BNPL lets consumers get their purchases immediately. The retailer also receives the fee for the product or service right away.
There are two popular ways that BNPL service agreements work. One of them lets you stagger equal payment amounts over a period of time, whereas the other allows you to make the entire payment in the future.
Each participating major retailer or company uses a specific BNPL platform. For example, you can use Klarna at Walmart Canada, whereas PayBright partners with Apple, eBay, and Wayfair.ca.
Terms and conditions, contracts, and interest rates vary depending on the BNPL platform.
Should You Use BNPL?
BNPL is a potential payment option for responsible individuals who:
- Pay bills on time to avoid extra charges,
- Maintain sufficient funds in their bank accounts to prevent overdraft payments, and
- Think about the total cost of a purchase to avoid overextending.
But unfortunately, research shows that the average BNPL user has more debt and lower credit scores than non-users. Eleven percent of Canadians admit that they have made a BNPL mistake, most commonly regarding regretful impulse purchasing.
Users who miss a BNPL payment may incur late fees or interest on unpaid balances. Depending on the BNPL lender, these costs can quickly create debt you can’t repay. And if payments stop altogether, a collection agency may take over, affecting your credit score.
Additionally, there’s the possibility of accruing overdraft fees on bank accounts. Overdraft fees can happen when a bank account acting as the default payment method lacks sufficient funds on the payment date.
Refunds of BNPL purchases can also be challenging. A user can incur a problematic, lengthy wait while the merchant returns the funds to the BNPL lender, which then passes the return to the consumer. Getting a return approved can take weeks or months, and it’s up to you to ensure you apply the refund to your BNPL loan.
When you use BNPL services to make several purchases, it’s easy to overextend your finances. By overspending on items you wouldn’t typically be able to afford if paying upfront, payments become challenging to manage.
The Key Takeaway About Buy Now, Pay Later Services
BNPL is a fast-growing payment plan that more and more retail merchants offer for online and in-store purchases. This 2022 Canadian Payment Methods and Trends Report found that one in 10 merchants accept BNPL, and 48 percent of merchants not offering BNPL are interested.
While these platforms streamline spending, they also expose users to financial risks. Since BNPL makes it so convenient to make purchases, countless consumers end up buying items they don’t need – and definitely can’t afford.
We must live within a budget and allocate money for our needs and wants for solid financial well-being. Although it takes longer, saving up the cash you need for purchases is one of the best ways to maintain positive financial health.
If you decide to use a BNPL platform, carry out your due diligence. And if you opt for a different way to finance, make sure it’s something you can pay on time and won’t harm your credit rating.
For more information on debt solutions or to book a free consultation, contact us today.
