More retailers than ever are offering customers the option to pay in installments at checkout. This payment method is called Buy Now, Pay Later (BNPL) and it’s transforming Canadians’ purchasing habits. Need to buy a couple of new chairs for your dining room, but short on cash? You can now spread the payment over several weeks. And unlike a credit card, your balance doesn’t collect interest.
However, despite the hype, BNPL isn’t some new and elaborate invention to turbo-charge your spending. It’s still a form of debt and carries the same risks if you borrow more than you can afford to repay. Those small, seemingly harmless payments can add up quickly, leaving you struggling financially.
In this guide, we’ll show you how BNPL loans work, the benefits and pitfalls to watch for, and what to do if your BNPL debt piles up to a dangerous level.
What is a buy now, pay later plan?
Buy now, pay later (BNPL) is a form of financing that lets you make purchases and pay for them over time. Instead of paying the full price tag upfront, you spread your payment in equal installments over a specific period, usually a few weeks or months.
Payments are usually split into four instalments, an arrangement known as “pay in 4.” However, you can also use BNPL plans to purchase pricier items, in which case, you make payments over a longer period. BNPL is usually interest-free and charges few, if any, fees.
BNPL loans are generally used to finance small purchases, such as clothing, groceries, furniture, and electronics, and various household essentials. According to a study by the Financial Consumer Agency of Canada, the most common reasons people turned to a BNPL service were:
- To help with budgeting
- To purchase an item, they couldn’t afford to pay in full right away
- To avoid interest and fees
Many brands in Canada accept BNPL as a payment method, including Samsung, Apple, American Eagle, Ardene, IKEA, Walmart, and Expedia. As an example, check out the list of retailers that have partnered with AfterPay, a BNPL provider.
How does a BNPL installment plan work?
Let’s assume you want to buy $200 worth of shoes from a retailer that partners with a BNPL provider. You decide to finance the purchases using a “pay in 4” plan, with payments made every two weeks.
At checkout (either in person or online), the retailer will process your purchase much as it would for a typical transaction. However, instead of paying with cash, debit, or credit, you choose the BNPL option (some BNPL plans allow you to set up post-purchase financing, too).
Under a “pay in 4” BNPL loan, you usually have to pay 25% of the purchase price upfront, with the remaining balance financed by the BNPL company. So, in this case, you pay the retailer $50 ($200 / 4) through your chosen payment method, while the BNPL company covers the remaining balance. In other words, they pay the retailer, and now you owe them the remaining $150, which you’ll pay off in three installments over the next six weeks.
BNPL installment plans vary, so it’s crucial to familiarize yourself with your BNPL provider’s agreement. This contract usually specifies the purchase amount, payment amounts, number of payments required, the payment frequency, interest rate, fees, and other key details. Ask the BNPL provider to clarify anything you don’t understand or have concerns about.
What are the different types of BNPL plans?
There are three types of buy now, pay later plans: equal payment plans, deferred payment plans, and credit card installment plans.
Equal payment plans
Under this plan, you make regular payments of the same amount until the balance is fully paid off. The BNPL agreement will specify the payment intervals and the minimum amount you must pay. Typically, the first payment is made at checkout, and the balance is paid in equal installments over 4-6 weeks.
Deferred payment plan
This payment plan offers greater flexibility, allowing you to make payments on your own schedule. The only requirement is that you must pay off the balance in full by the due date. BNPL companies usually advertise this payment model as a “don’t pay until” plan.
Credit card installment plan
Banks and credit card issuers usually offer this type of plan. It’s sometimes called an “equal installment plan” and is popular among seniors. In this case, you use your credit card to complete the purchase and convert the transaction into an installment plan, with equal payments over several months. BMO’s PaySmart plan is a good example of this service.
Given the longer repayment period and payment flexibility, these plans charge interest, but the rate is usually lower than a standard credit card APR. Promotional interest rates, sometimes as low as 0% may be available for BNPL purchases, too.
Where can you get a BNPL loan in Canada?
In Canada, several fintech companies offer BNPL plans, including:
- Afterpay
- Sezzle
- Klarna
- Affirm
- Zip
- Splitit
- iFinance
- Flex Pay
Some banks and credit card issuers also offer BNPL payment solutions:
- CIBC Pace It
- MBNA Payment Plan
- Scotia SelectPay
- BMO PaySmart
What are the advantages of BNPL plans?
Interest-free payments
Financing a purchase with BNPL won’t cost you a single dollar in interest if you make all your payments on time. Some credit card-based BNPL plans also offer 0% promotional offers.
If you’ve been paying interest and high fees in the past when using a credit card, cash advances, or payday loans, you can reap some nice savings by switching to a BNPL service.
Budget flexibility
Strict budgeting isn’t realistic for each household. If you value flexibility when it comes to spending, BNPL can help you better manage your money. You can purchase something right away without worrying about whether you’ll have enough money to cover your electricity bill or the next grocery haul. Using a BNPL loan, you can stretch your budget further, thanks to the split-payment feature.
No hard credit check
You don’t need to pass a hard credit check to obtain a typical “pay in 4” BNPL loan. So not only does your credit score stay intact (hard checks briefly ding it), but qualifying is fast and easy. In contrast, you must have a good credit score (around 650) to be eligible for a standard credit card.
What are the dangers of BNPL plans?
You can end up owing a lot of money—and fast
BNPL loans are a cheap form of borrowing but only if you pay on time. Missing BNPL payments can trigger late fees and high interest charges, which can add up quickly if you’ve made multiple purchases.
Late fees can reach $7 if you miss a payment by more than a week. And interest rates for long-term payment plans can be as high as 30% (or more). Some BNPL providers also charge a monthly processing fee, depending on the plan you use. As a result, you could end up owing way more than you initially planned and sinking deeper into debt.
Risk of overspending
The convenience and accessibility of BNPL loans are a double-edged sword: they can easily lead to overspending.
When you pay only a quarter of the price at checkout, purchases seem more affordable, encouraging bad spending habits. And since there are no fees or interest charges, it doesn’t feel like you’re using a credit card or a payday loan—your actions seem responsible, and you feel less guilty when shopping.
Unfortunately, this illusion usually fades too late, and you’re stuck with more debt than you can afford to pay.
Negative credit impact
Some BNPL service providers report payment activity and account balances to credit bureaus (more on this later on). So, as with any loan, missing payments or carrying a large balance can bring down your credit score.
Tough to manage payments
Keeping track of one BNPL plan and paying on time is fine. But staying organized can be daunting if you’ve racked up many purchases. You’ll have to remember multiple due dates and constantly adjust your budget to accommodate them.
How do BNPL loans affect your credit score?
Using a BNPL loans can impact your credit score, but not necessarily to the same extent as other forms of debt. Here’s what you can expect.
Credit checks
In general, BNPL providers don’t conduct hard credit checks during the application process. Instead, they perform soft checks, which don’t impact your credit score and aren’t visible to other lenders when they pull your credit report.
However, BNPL services may conduct a hard credit check when you apply for a long-term installment plan or financing option. These types of agreements are common for larger purchases, which would be harder to pay off through the typical “pay in 4” plan.
Credit reporting
Historically, BNPL providers didn’t report BNPL payments to credit bureaus in Canada, so they wouldn’t appear on your credit report. This was especially true for “pay in 4 installments” plans.
However, this practice is changing. For example, Equifax Canada has begun including payment history from BNPL companies, which could influence credit score calculations. Similarly, TransUnion is looking at ways to integrate BNPL activity into its credit reporting. Depending on whether you pay on time, this reporting can harm or enhance your credit score.
Still, it’s up to BNPL providers to decide whether to report customers’ transactions to credit bureaus. So, whether your credit score is impacted depends on whether they choose to report your payment history.
For example, Klarna doesn’t report BNPL payment activity for “pay in 4” and other short-term financing plans. But it does share the information with credit bureaus if you use its “pay over time” plan. On the other hand, Sezzle sends payment data to credit bureaus, but only with your permission.
In addition to payment history, using a credit card-based BNPL will affect your credit utilization ratio. The higher your credit usage, the more likely your credit score will decrease, and vice versa.
How to use BNPL loans properly
While BNPL offer a convenient way to make purchases with flexible payment options, you have to manage them wisely to avoid falling deep in debt. Here are some rules of thumb to follow to keep your finances in good shape:
- Make sure you calculate the total cost of financing a purchase using a BNPL plan, including interest, credit card processing fees, setup fees, and late fees. If the price is too high for you, look for another option.
- Review the BNPL agreement to understand the consequences of missing a payment, including the impact, if any, on your credit report.
- Avoid stacking BNPL loans, as it can be challenging to keep track of multiple due dates.
- Only spend what you can afford to pay by the due date to avoid increasing your debt commitments.
- Only use BNPL for urgent or necessary purchases, not everyday expenses or frivolous spending.
- Finance your purchases with a single BNPL provider to simplify payment tracking and understanding your obligations.
- Set reminders using a calendar or budgeting app to stay on top of payment due dates.
What to do if you can’t afford to repay BNPL loans
Is your BNPL debt growing at an alarming rate, leaving you struggling to manage your payments? If so, you’ve probably overextended yourself, which is always a risk with BNPL plans. Here’s what you can do to ease the financial pressure:
- Review your budget and cut out unnecessary expenses to free up cash flow for BNPL payments.
- Consolidate your BNPL debts under a single low-interest loan.
- Modify your BNPL payment plans to better align with your paycheque and overall budget (this may involve negotiating with the BNPL provider).
- Focus on paying down the most expensive BNPL loan using the debt avalanche method.
If these strategies don’t help, consider a more robust and long-lasting solution, such as filing for bankruptcy or a consumer proposal.
Can you include BNPL loans in bankruptcy?
Yes, you can include BNPL loans in bankruptcy. BNPL loans are unsecured, meaning there’s no collateral attached. As such, they’re eligible for discharge through bankruptcy, which deals exclusively with unsecured debts, such as credit cards and payday loans.
You can also include BNPL loans in a consumer proposal, a form of debt relief governed under the same laws as bankruptcy. Under this program, you have the opportunity to negotiate a new payment plan with your BNPL creditors (and other unsecured lenders) to pay less than what you owe. Caution – You should not make a lot of purchases with BNPL loans just before filing as this could be considered as a bankruptcy offence.
The bottom line on BNPL loans
BNPL loans can be a great way to manage your spending, especially if you need extra money to stretch your budget or stay afloat until your next paycheque. The interest-free installments can be hard to pass up when compared with pricey alternatives like credit cards, lines of credit and payday loans.
However, missing payment due dates, juggling multiple BNPL loans, or relying on BNPL to cover your day-to-day expenses can quickly spiral out of control. If you’ve found yourself borrowing more than you can handle, you’re not alone. Many Canadians are facing debt problems, whether due to BNPL services or other types of debt.
At David Sklar & Associates, our team of Licensed Insolvency Trustees (LITs) can help you deal with BNPL loans and other unsecured debts. Whether you need help consolidating your debts, negotiating lower payments through a consumer proposal, or exploring bankruptcy as a last resort, an LIT will review your situation and explain every option available to you. Contact us today to book a free, no-obligation meeting—you deserve a debt-free future!
