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Buy Now, Pay Later - What You Need to Know

With notes from Graham Christian

If you’re online shopping and make your way over to the checkout page,, you may have noticed the “buy now, pay later” option (or BNPL for short).

Offered by companies such as Paybright, Sezzle and Afterpay, BNPL has become increasingly popular among Gen-Z and millennial consumers who want more control over how they can pay for their purchases. Ikea recently announced their own Buy Now Pay Later plan in partnership with Afterpay for online purchases, and PayPlan by RBC for in-store purchases.

But what is BNPL, anyway? And is it worth using as a payment option? Let’s take a deeper look.

What is buy now, pay later, and how does it work?

The concept behind BNPL is pretty straightforward: say you’ve found the perfect price for a product or experience (like a flight), but it’s a bit more than you wanted to spend. The idea of all that money leaving your account at once makes your chest tighten, but you know you’ll regret it if you don’t jump on it now. If the retailer offers a “buy now, pay later” plan, you’ll be able to make an initial payment to secure the purchase, then complete the transaction by making a series of scheduled low-interest or interest-free payments over time until the item is paid off in full. Payments are typically bi-weekly over a set period of time, or monthly with banks or for larger online purchases.

To be eligible for the BNPL program, you have to apply and the provider will do a soft credit check (which does not impact your credit score). If you are approved, you can use the same program for as many purchases as you want.

Why do people use buy now, pay later plans?

According to a Financial Consumer Agency Canada (FCAC) study, 42% of those who claimed to use a BNPL service did so because they felt it would help them budget better. “The [payments] do spread out the cost over a period of time, and can be good if you are purchasing quite far in advance,” says chartered professional accountant and author Janine Rogan. Consumers also list the following reasons for using BNPL plans, according to the FCAC report:

  • They couldn’t afford the entire purchase right away
  • They wanted to avoid interest and fees

Data aggregator RFI Global’s BNPL Consumer Report also says that some users turned to these installment plans to reduce their credit card usage.

According to the same FCAC study, 71% of online BNPL service users like Afterpay or Sezzle in Canada were between the ages of 18-34. This may be partly due to younger Canadians not having access to credit or having a poor credit score, so BNPL plans give them access to credit and the ability to make online purchases. Older consumers, especially those aged 65 plus, tended to choose installment plans from banks rather than online providers.

Is buy now, pay later risky?

Buy now, pay later programs are not inherently risky - if you can keep track of and afford to make your payments on time. “People can get in trouble if they really can't afford the additional expense, or if they have too many monthly BNPL payments.” Rogan says. That’s because if you fail to make a payment on time, you’ll likely be charged late fees on top of the payment you owe for the initial purchase. This can really snowball and grow your debt over time.

Does buy now, pay later hurt your credit score?

Soft credit checks are conducted when you are applying for a BNPL program, and they do not impact your credit score. Missed payments may negatively impact your credit score if you choose a plan that reports payments to credit bureaus like Equifax or Transunion, so always check the terms and conditions. However, if the BNPL provider reports payments to credit bureaus, then making payments on time could potentially help improve your credit score.

How to use buy now, pay later properly

Even if you don’t have enough money for the initial purchase, make sure you understand how much the installment payments will cost you. Try to budget for them, and set aside the money you will need for weekly payments in a separate savings account.

“If it's something you won't consume (like a flight) for months and months it can make sense to use a BNPL plan,” Rogan says. “A flight might also go up in price the closer you get to booking it, so locking in a lower cost could be beneficial.”

Rogan recommends the 48 hour rule: wait for 48 hours before purchasing something, and if you have the funds to purchase it and you still really want it 48 hours from now, then give yourself permission to purchase it. She says that usually you will have forgotten about the purchase within 48 hours, especially if it’s something you don’t really need.

If it is something you need, or in the case of an emergency and you don’t have the funds in your emergency savings to cover the expense, Rogan says a BNPL may cost less than putting something on your credit card and paying interest on it. Credit cards have an average interest rate of 19.99%, and some BNPL plans charge no interest on payments or as low as 4.99% interest. But again, always aim to save up for big purchases in your emergency savings fund so you can avoid taking on debt if possible.

Buy now, pay later providers in Canada

When it comes to the fine print behind BNPL plans, every provider is different. Let’s take a look at four of the biggest names in the buy now, pay later market.

Sezzle

Partnered with over 34,000 retailers, Sezzle offers their customers an interest-free, four-part payment plan over six weeks, but you’ll have to pass a soft credit check first. You have a few options with Sezzle:

  1. Your initial payment is 50% of the total cost of the purchase. Then, you pay the other 50% two weeks later.
  2. Pay for 25% of the purchase upfront. Then, make four no-interest payments over six weeks.
  3. Pay monthly for larger purchases - subject to approval, and at a rate of anywhere from ​​5.99% - 34.99%. The benefit of BNPL plans is usually no-or-low interest rates, so really pay attention to the terms.

Be ready to incur fees in the event of a failed/missed payment (or if you revise your payment dates twice or more on the same order). These charges will be added to your scheduled payment amount. As an added bonus for those looking to build credit, their Sezzle Up option will give your payment history to credit bureaus - but keep in mind the risk of missed payments negatively impacting your score.

AfterPay

In a similar fashion, AfterPay also requires you to make the first of four payments at the point of purchase. After that, you’ll have six weeks to pay the rest of the installments with zero interest. Their app (which connects to your debit or credit card) makes your payment schedule viewable at any time, but you’ll also receive reminders from AfterPay as well.

In the event of a missed payment, your account will be paused. You’ll only be charged late fees if you do not login and attempt to make the payment after being notified. For orders under $40, you won’t be charged more than 25% of the order. For orders above $40, you’ll be charged a $10 partial late fee, and another late fee (of up to $7) will also apply if the payment remains unpaid seven days after the due date until you reach than 25% of your total purchase cost, or $68 in fees. AfterPay recently collaborated with Ikea to deliver a buy now, pay later plan with four interest-free payments, payable bi-weekly over six weeks.

Klarna

For those who’d rather not worry about remembering their payments, Klarna’s four-part installment plan offers more of a “set it and forget it” approach, automatically withdrawing the funds from your credit/debit card every two weeks. The only downside? They’re not quite as flexible as some of their competitors, as you can’t change the timing of your payments once you lock into a plan.

That being said, Klarna doesn’t charge any interest or late fees for missed/late payments, but you may be banned from using their service in future. This could potentially encourage overspending.

PayBright

Having the distinction of being Canada’s first BNPL provider, PayBright offers two ways to purchase: “Pay in 4” and “Pay Monthly.”

Their Pay in 4 option involves no credit check and, providing you make your bi-weekly payments on time, you’ll also avoid interest. Alternately, their Pay Monthly plan operates more like a traditional loan and does involve a credit check/interest (the latter of which can be as high as 29.95%), so best to think it through before going down that path.

While there are no late fees for missed payments, PayBright will ban you from making any future purchases using their service.

Banks that offer buy now, pay later options in Canada

Interested in the idea of BNPL but uncomfortable using a third-party service? Many trusted banks and financial institutions now feature plans of their own. Keep in mind that if you don’t make the minimum monthly installment payment in full, the unpaid balance on your payment will be subject to the regular purchase interest rate starting the next statement period. The regular purchase interest rate on a credit card can be as high as 22.99%, much higher than the rates offered on installment plans which are around 5.99%. 

Here are five options we’ll explore in further detail:

American Express Plan IT™

American Express offers its Plan IT program for those who would rather pay off their American Express credit card balance gradually over a set number of months. Using this option, you would choose one recent purchase and select one of their four plan options (3, 6, 9, or 12 months) with a monthly fee. They also have a separate plan where you can pay a portion of your mot recent statement balance in installments.

One of Plan-It’s best features is its transparency: once you’ve selected an amount to pay off, you can view upfront how much you’ll be paying per month under each plan option. Once you’ve selected the plan that works for you, you can review your total amount owed under the plan and confirm.

While there is an installment fee, it varies depending on the card you have and its accompanying interest rate. American Express Plan IT™ is also not available to residents of Quebec, Nova Scotia, PEI, and Nunavut. 

CIBC Pace It

The CIBC Pace It program gives you the ability to pay installments on purchases made with your eligible CIBC credit card. Their plan options are 6, 12, and 24 months, and each carries a much lower interest rate than the bank would normally charge on one of their credit cards (6.99%, 7.99%, and 8.99%, respectively). A one-time installment fee (2% of purchase amount) is also applied.

Qualifying cardholders can use the CIBC app to select an eligible purchase for Pace It, leaving the rest of their available balance unaffected. You can also create multiple installment plans for different purchases, giving you the flexibility to pay off more than one purchase at the same time. Make sure you’re not signing up for more than you can pay off, however, because unpaid balances can add to your credit utilization ratio and potentially hurt your score.

MBNA Payment Plans

MBNA offers Payment Plans, giving customers with MBNA credit cards the option to pay for purchases of $100 or more in monthly increments over periods of 6, 12, or 18 months with a one-time fee corresponding to whichever plan you choose (between 4%-8%). Customers can log in to MBNA’s online banking to view and set up Payment Plans by following their step-by-step instructions.

Payment Plans also offer a high amount of flexibility, allowing you to have up to 25 active installment plans at one time. And while you can’t adjust your plan once locked in, you always have the ability to cancel. MBNA does say that if you don’t make the minimum payment on your statement balance, then ”the Payment Plan interest rate will no longer apply to the unpaid portion of your Monthly Plan Payment Amount, starting the next Statement Period. The unpaid portion will be charged interest using the interest rate for purchases then in effect on your credit card.”  Purchase interest rates can be quite high compared to the 4%-8% interest offered on their payment plans.

Scotia SelectPay

Scotia SelectPay from Scotiabank allows you to pay off purchases of $100 or more using a 3, 6, or 12 month plan with low interest rates. They also do not charge installment fees for their plans.

Users can access the SelectPay feature on the Scotiabank app to choose an eligible purchase and a plan. You have the option to cancel at any time with no fee, and there is no limit to how many installment plans you can keep active at the same time, providing you with a ton of flexibility. 

Alternatives to buy now, pay later plans

While BNPL plans are currently very popular, they might not make sense for everyone. For those looking for other ways to tackle a big purchase, here are some more traditional options that could work just as well.

Building a sinking fund

If you have a large purchase coming up like a flight or buying new furniture for a renovation, start building a separate high-interest savings account for it. You can automate transfers to your account each month, or set aside a certain amount after you’ve paid for rent, mortgage payments or other essentials. That way, when the time comes to make a purchase, you borrow from yourself at no cost because you’ve already set aside the money and won’t need to pay interest to your bank or financial institution.

Low interest credit cards

If you’re looking to pay off an expensive item over time rather than all at once, using a low interest credit card could be a great idea. While they typically don’t come with a lot of perks, low interest cards are usually easy to get approved for and will allow you to complete your purchase in a reasonable amount of time without collecting too much interest on top of the principal. Just try to stay on top of minimum payments and ensure you’re tackling the debt over time rather than allowing it to snowball.

The best low interest credit cards

Compare Canada’s best low interest credit cards

Personal loans

Getting a personal loan is another way to handle a large expense. With this method, you’ll borrow however much you need and pay it back to your lender over time using a pre-set schedule of payments. Online resources such as Loans Canada can be helpful in finding you the best rates. While your interest rate on a personal loan will largely be influenced by your provider as well as your personal credit score, it can typically run between 15% and 45%.

Lines of credit

You may also want to think about taking out a line of credit with your bank. With this option, you’ll be able to borrow money up to a pre-set amount, but can use as little or as much of it as you’d like. You’ll be allowed to pay back what you owe at any time and only pay interest on what you’ve borrowed. The amount of interest you’ll pay depends on your credit score at the time you took out the line of credit as well as general market fluctuations.

The bottom line

Buy now, pay later plans are popular in Canada for a reason. Not everyone has the financial flexibility to comfortably pay for big purchases all at once, so having the ability to space out your payments over time (often without collecting interest) is alluring to many consumers. But, as with anything, there are benefits as well as drawbacks, so make sure you get all your questions answered before signing up. 

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