Buy now, pay later (BNPL) is making waves in Canada. It’s a tempting option for consumers who want or need an item but don’t have the cash to pay for it. BNPL is actually a point-of-sale installment loan that stretches out your payments for a certain period of time.
When you take out one of these loans, you usually make an initial payment on your purchase and then arrange to pay off the remainder over the following weeks or months. While these loans do offer several significant benefits, they are not without their drawbacks. You need to understand all their pros and cons before you apply for one.
How Does BNPL Work in Canada?
Some retailers, credit cards, and online payment systems allow you to choose their buy now, pay later option, either at a brick-and-mortar store or online. When you’re checking out, these organizations will give several payment options, including BNPL. Thanks to buy now apps, applications can be filed and answered in mere minutes. If approved, you’ll be required to make a down payment, often 25% of the total, and the rest will be paid in installments drawn from your bank account, credit card, debit card, or another payment method.
For instance, PayPal often offers this buy now, pay later option. If you’re buying a pair of shoes online for $100, you may be given the chance to pay $25 upfront and then make three more $25 payments to PayPal over a specified period of time. That way, you can get your merchandise now instead of waiting until you have the full $100 to spend.
What Are the Benefits of BNPL?
BNPL has advantages over using a credit card. Often, there’s no interest on these loans. Also, you’ll receive almost instantaneous approval if you qualify. BNPL does not affect your credit score unless you fail to make your scheduled payments. Simply applying for one, even if you are denied, does not cause you to lose points.
What Are the Disadvantages of BNPL?
Like any finance method, BNPL comes with some drawbacks. These loans are really easy to get. Making impulse purchases and unplanned shopping sprees more likely. Before you know it, you can find yourself with hefty installment payments over the coming months. Other disadvantages include:
Making timely payments on your BNPL does not improve your credit score since they are not reported to the credit bureaus or organizations like Credit Karma. However, if you miss a payment or completely default, the company will report you to the credit bureaus, and you will see your score drop.
You will probably face high-interest rates and penalties if you miss a payment or have insufficient funds in your linked account to cover the installment.
Getting a refund for a product is more difficult because you must deal with both the BNPL provider and the retailer.
BNPL has less oversight than other financial lines of credit, which makes you more vulnerable to a fraudulent company.
How Does BNPL Compare With a Layaway Plan?
While BNPL and a layaway plan both depend on installment payments, they differ in significant ways. A layaway plan does require a deposit, but they’re usually smaller than what’s required for BNPL. Also, layaway plans generally offer a longer payment period, giving you more time to pay off your purchases.
Layaway plans may call for a minimum payment, but you can vary the amount you pay each time depending on your financial circumstances. Also, you can cancel a layaway plan without harming your credit. Refunds are typically easier with layaway plans, including the money you’ve already paid.
Unlike BNPL, a layaway plan requires that the merchandise be paid in full before taking it home. Layaway plans tend to be limited to the holiday season and are often only available in brick-and-mortar stores. Some retailers limit what items can be put on layaway.
Is BNPL Right For You?
Should you buy now, pay later in Canada? Like many financial questions, the answer is: “It depends.” Buying now and paying later, when used properly, can be a helpful tool. These loans are short-term installment plans that allow you to avoid fees and interest. As long as you pay them off on time, they do not affect your credit score.
However, you must use these loans sparingly and not rely on them to purchase items you do not need and cannot afford. BNPL charges interest when you fail to meet your agreement, and the penalty charges can be steep.
The key to BNPL is being honest with yourself when answering a few thoughtful questions. Do you really need the item? Can you handle the payments comfortably? Do you have a backup plan if something happens and you can’t pay?
Why Use Debt.ca?
If you find yourself with too much debt, including BNPL, credit cards, or loans, our Credit Counsellors can offer you financial relief. We offer several debt management options that can help get your finances back on track. For more information, contact us today.