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With more options to buy now and pay later popping up, we ask the million-dollar question (in four easy payments): What’s the real cost for Canadians?
When you’re ready to tap “check out” on your online purchase, you might see an option to pay in installments. This is what is known as a “buy now, pay later” (BNPL) offer, and it’s becoming more popular, both at online retailers and in stores.
Amid high costs of living in Canada, many shoppers find it tempting to make a large purchase without draining their bank account or piling on more credit card debt. Third-party credit companies, like PayBright, Afterpay, Sezzle, Klarna, Uplift, Affirm and even PayPal, make that possible by offering financing options at major retailers such as Hudson’s Bay, Sephora, Samsung, Endy, Wayfair and others.
But, as BNPL’s popularity continues to grow, it’s important to understand how it works, the benefits, the potential drawbacks, and how these services might impact your credit score.
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Buy now, pay later (sometimes called BNPL loans or interest-free financing) is a financial credit service in Canada that allows consumers to buy goods and services and make payment in installments over time, rather than paying the full amount upfront. BNPL services may be available for items ranging in price from less than $100 to thousands of dollars.
In a recent interview on the Moolala: Money Made Simple podcast, Stanford Graduate School of Business professor Ed deHaan told Credit Canada CEO Bruce Sellery that BNPL “essentially provides short-term credit, and it’s free” if you pay by the deadline. Typically, BNPL plans spread payments over four to six weeks. Some may be longer, offering installments over a couple of months.
BNPL services often consider eligibility based on different criteria than what other lenders look at, making financing more accessible to people who may not qualify for, or prefer not to use, traditional credit cards. When paid in full and on time, some BNPL services may also be beneficial for people with little to no credit who are looking to establish a credit history.
“Because [BNPL plans] don’t require a credit check, they’re giving credit to a lot of people who might not otherwise get it,” deHaan said in the interview.
BNPL companies generate revenue by taking a small cut from each transaction processed through their service and, in some cases, may also collect late fees and interest directly from customers. However, different companies might structure their BNPL loans in different ways, so there’s no single standard for how a BNPL works. Typically, you’ll make an initial payment at checkout and then pay off the remaining balance in fixed or variable payments over a set period, such as bi-weekly or monthly. Which service you can choose depends on where you’re shopping, since BNPL companies partner with merchants directly.
“Now, what’s a little bit different than a credit card is with BNPL you pay 25% of your purchase upfront when you buy your product, and then you pay 25% every two weeks after that, so you’re done paying in six weeks,” deHaan explained, as an example. “And again, if you pay on time, there is no interest and there’s no fees.”
According to the Better Business Bureau, the third-party BNPL company makes money by charging retailers a small percentage of each sale made through its service and, in some cases, collecting late fees and interest from customers directly. Interest rates on these types of services range between 0% and 30%, depending on the retailer and your credit history. The payment period can last as little as a couple of weeks or as long as 39 months. How do those annual percentage rates (APRs) compare to the card in your wallet? Credit card interest rates range from around 8% (for low-rate cards) to 20% (for standard ones). Also, if you pay your credit card balance on time, you are not charged interest. (Did you know you might be able to negotiate a lower rate on your credit card? We have more tips for paying off your credit card.)
It’s important to note that some BNPL plans may charge interest if the bill is not paid in full by the deadline, and late payments could incur fees or impact your credit score. Be sure to review the terms carefully.
For example, Afterpay does not charge interest on payments, but it does charge a capped late fee of 25% (more on the costs below). Before using BNPL, consider the repayment schedule, any associated fees and whether it aligns with your budget. This will help you make an informed decision that suits your financial needs.
Interest rates for these services can vary widely, typically ranging between 0% and 30%, depending on the retailer and your credit history. Repayment periods can vary greatly as well, with some being as brief as a few weeks and others as long as 39 months. For reference, credit card interest rates range from around 9% (for low-rate cards) to 20% (for standard ones)—and you are not charged interest if you pay your credit card balance on time.
If you miss a payment with BNPL, the consequences can vary depending on the finance company. Typically, though, you’ll incur late fees for a missed payment. It’s also possible that your account will be immediately locked, to prevent you from making further purchases. If you miss multiple payments, this could lead to further restrictions on future BNPL use, and your file could be sent to a collections agency to recover the money, which will impact your credit score.
| BNPL company | What happens if you miss a BNPL payment? |
| Afterpay |
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| Klarna |
|
| Sezzle |
|
| PayBright |
|
| PayPal |
|
The adoption of BNPL plans is most prominent among “young people without established credit scores who are comfortable with their phones, tap-to-pay technology, and are comfortable shopping online,” said deHaan.
According to a 2021 study done by the Financial Consumer Agency of Canada, gen Z and millennials are the main users of BNPL. The study found that 71% of this age group used BNPL services online, more than any other age group in the poll. The study also reported that 42% of those surveyed said they used a BNPL to help themselves budget, 39% said they couldn’t afford the entire purchase right away, and 23% said they wanted to avoid interest and fees. (Use MoneySense’s free Excel budget template.)
While BNPL can make it easier to shop, it’s important to know how these payment options could affect your credit report and credit score. This will largely depend on which BNPL plan you choose to apply for, as they all have different terms.
Some BNPL providers report your payment history to credit bureaus, which can positively affect your credit score if you make the payments on time. In addition, many BNPL providers only run a soft inquiry on your credit report to determine eligibility. That said, it’s possible that a credit check isn’t done at all. So, in this case, your credit report and credit score won’t be impacted by simply applying for BNPL.
There are some potential downsides. BNPL loans often require repayment within a short period, especially for smaller purchases, which might not contribute significantly to building your credit history. In that case, a credit card would be a better option. In addition, not all providers report to credit bureaus, which can create what deHaan calls “phantom debt.” When your credit score goes down, credit card companies can see this and won’t offer or approve you for another card, but that’s not the case with BNPL. This can cause consumers to take on more debt than they can handle.
DeHaan explained how it works: “So, I open a BNPL account with one provider, I max it out, I can’t pay it off. I go to the next one, I do the same thing… And before I know it, I’ve got three or four maxed-out credit lines, and the reason I can keep getting them is because there’s no reporting about each other’s maxed-out limits.”
Before signing up for any BNPL service, ensure you can comfortably repay your purchases in full. While BNPL can potentially boost your credit score through timely payments, it can also negatively impact your score if you miss any payments, leading to additional debt from late fees and interest charges.
BNPL options benefit retailers in several ways. It can increase sales by allowing customers to spread out payments, encouraging them to spend more with larger purchases. In addition, BNPL providers typically handle the financial transactions and assume the risk of non-payment, so there’s no risk to the retailers themselves.
While the convenience of BNPL can be tempting, it’s important for consumers to read and understand the terms and conditions that come with installment plans. If you’re not careful, BNPL may deter you from achieving your financial goals. Like all loans, these plans aren’t without risks. Here are a few to know about.
For some, installment plans can encourage impulse spending. Deferred payments are an extremely popular option for many Canadians feeling the pinch of inflation and lifestyle creep. Being able to buy something that was previously unobtainable may tempt you to spend more than you can afford.
“When credit is cheap and easy, some might get themselves into trouble by spending beyond their means. With BNPL, many of the users tend to be the most vulnerable [financially], and they might not yet have a credit score,” deHaan said.
Debt from deferred-payment plans can add up surprisingly quickly. Unless you’re closely monitoring your monthly spending with some kind of expense-tracking and budget-planning solution, it’s easy to forget how much money you need to set aside for your BNPL payments—especially since it’s the retailer that partners with the BNPL company. So, depending on where you shop, you might not always use the same company.
On top of that: “Many people are simply paying their BNPL with a credit card, which is just sort of compounding the problem,” deHaan said.
Some BNPLs don’t require regular monthly payments. Instead, you’re required to pay the full sum by a specific date (usually six to 12 months later). BNPL companies might not send any notices, bills, reminders or invoices until the time has almost run out. Then, once the BNPL due date passes, the full sum becomes due, possibly with interest. What was supposed to be a small purchase could be added to your debt load.
Through his research on financial reporting and household finance, deHaan found the average BNPL consumer experiences “leading indicators of financial distress” after one to three months following their first use of the service. This included missing BNPL payments or sacrificing other payments, such as credit card bills, to cover the cost of the BNPL.
As a professionally certified credit counsellor with Credit Canada, here are my tips for using BNPL:
The bottom line: As good as “buy now pay later” may sound, it’s important to use these credit services with caution. Under the right circumstances, BNPL plans can be useful tools for some. However, deferring payments has the potential to increase your debt load.
Make sure you have the money to pay. Paying on time can potentially boost your credit score, but missing payments will have the opposite effect. It creates additional debt from late fees and interest charges. It’s important to responsibly manage BNPL obligations, as with any financial commitment, to avoid taking on more debt than you can handle.
Whether you’ve fallen behind on deferred payments, you’re struggling with credit card debt, or you’re looking to improve your credit score, Credit Canada is here to help. Contact Credit Canada today to book a free credit-building counselling session for personalized advice tailored to your financial situation.
This is an unpaid article that contains useful and relevant information. It was written by a content partner based on its expertise and edited by MoneySense.
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