Right now, you may be looking at the latest Apple Macbook and thinking, “It looks perfect, but I just can’t afford to pay over $2,000 all at once, and I probably won’t get approved for financing.”
This is where buy now, pay later programs come in. These programs provide short-term financing and allow consumers to break the cost of their purchase into affordable payments.
If you’ve never used buy now pay later in Canada, then you’re in the right place. Below, I’ll explain exactly what BNPL is, how it works, and discuss some of the pros and cons of using after-pay programs.
What Is Buy Now, Pay Later (BNPL)?
If you’ve been shopping online recently, then you’ve no doubt seen that many online retailers are offering buy now, pay later programs to their customers. The only problem is that some shoppers still don’t know exactly how buy now, pay later works in Canada.
Buy Now, Pay Later programs provide short-term financing by allowing shoppers to split the total cost of purchase into weekly, bi-weekly, or monthly payments that are more affordable.
One of the main selling points of buy now, pay later is that it doesn’t require a hard credit check. Prior to buy now, pay later programs, consumers would have to apply for in-store financing (which involves a hard credit check) or use their credit card (which comes with added interest).
In short, buy now, pay later programs:
- Don’t charge customers any extra interest
- Allow customers to split almost any online item into affordable payments
- Don’t require customers to undergo a hard credit inquiry
- Don’t affect your credit score
Buy now, pay later programs are perfect for handling emergency expenses or buying last-minute gift items that you failed to budget for.
If you’re using buy now, pay later for the first time, you generally won’t be allowed to finance a large amount.
However, once you build a record of good payment history on your account, you’ll be allowed to finance more costly items.
How Does Buy Now, Pay Later Work?
Buy now, pay later programs primarily work with major online retailers. However, you may find some smaller retailers that offer third-party BNPL options on their online stores. Overall, buy now, pay later programs are pretty simple.
Here’s how buy now, pay later works:
- You’ll create an account with the buy now, pay later company, and provide some basic personal information. Upon signing up, the company may perform a soft credit check (which won’t appear on your credit report) to determine how much it will allow you to finance at one time.
- Buy now, pay later companies often have a network of retailers that they’re partnered with. You can use your BNPL app to access these online stores directly and shop online as you normally would.
- When it’s time to check out, you’ll use your buy now, pay later program to pay for the total amount of the purchase. This would include the cost of the item, shipping/handling, and any applicable sales taxes.
- Some BNPL apps work directly with the site to handle the purchase, while other BNPL apps create a temporary card for you, allowing you to copy/paste the card information during the checkout process.
- Most BNPL programs require buyers to immediately pay 25% of the item’s cost upfront and will then break the remaining 75% of the purchase into three weekly or bi-weekly payments.
Let’s just say that you want to purchase a $400 camera using a buy, now pay later program. As long as the BNPL app approves you for the purchase, you would typically put $100 down towards your purchase. Afterwards, you would be billed $100 every two weeks until you paid off the total amount six weeks later.
Does Buy Now, Pay Later Affect Your Credit Score?
One of the main reasons why buy now, pay later programs have become so popular in recent years is that they don’t affect your credit score. Unlike a personal loan, in-store financing, or paying for an item with your credit card, BNPL has no impact on your credit.
This means that, hypothetically, an individual with poor credit could finance the $500 laptop they need for school.
The only way that buy now, pay later will affect your credit score is if you become delinquent on payments and your account is sent to a collection agency.
This is good news for younger individuals who are still working on building or repairing their credit and can’t get approved for a good credit card or financing.
While this is good for some people, it’s not so great for other consumers. When you pay off a traditional short-term loan or credit card, it can improve your credit rating, as the payments are reported to the major credit bureaus.
By contrast, BNPL payments are NOT reported to credit bureaus, so there’s no official record of them.
BNPL: Pros & Cons
When used responsibly, BNPL is a great tool that can help consumers afford items that they otherwise wouldn’t be able to afford all at once.
That being said, there is just as much potential for misuse, especially if the individual in question doesn’t have an idea of what their budget is.
Recently, BNPL programs came under scrutiny after young shoppers found themselves drowning in debt after using BNPL too often and racking up more payments than they could afford to pay on time.
Currently, both the US and UK are working on plans to regulate BNPL companies, and Canada is likely soon to follow.
So, with that in mind, here are some of the pros and cons of buy now, pay later.
- Allows customers to finance expensive items that they can’t afford all at once
- BNPL doesn’t affect your credit score (unless you’re delinquent on payments)
- BNPL is usually interest-free or low-interest.
- BNPL “buying power” typically increases whenever you successfully complete a payment plan, allowing you to finance more costly items
- BNPL can encourage customers to purchase items that they really can’t afford (even with payments)
- Completing a BNPL payment plan won’t improve your credit score
Buy Now, Pay Later Companies In Canada
Buy Now, Pay Later Alternatives
To wrap things up, here are a few alternatives to buy now, pay later in Canada.
1. Layaway Programs
Some stores offer layaway programs to customers. The store will offer to hold an item (set it aside) for you and will set you up with a payment plan. Once you complete your payments, you’ll be given the item.
2. Cashback Credit Cards
Cashback credit cards allow you to “finance” the cost of your purchase, and also allow you to earn cashback on your purchase. However, carrying a balance over to the next month could hurt your credit score and result in extra interest payments.
3. In-Store Financing
Some major retailers (such as Apple, for example) offer in-store financing to help their customers afford certain items. In-store financing often comes with lower interest rates compared to a personal loan or credit card, but often requires a hard credit inquiry.
How Do Buy Now, Pay Later Companies Make Money?
When I first heard of buy now, pay later, my first thought was, “How do these companies make money?”
BNPL companies make money from the retailers they’re partnered with.
Whenever a customer uses a BNPL program to make their purchase, the retailer has to pay the BNPL company a small commission of the sale. Essentially, the BNPL company is allowing a customer who otherwise wouldn’t be able to afford the product to buy the product, which reduces walk-out customers for businesses.
The BNPL company takes on all of the liability to provide short-term financing that the retailer wouldn’t otherwise want to be involved in.
Conclusion – Should I Use Buy Now, Pay Later?
Thinking of using buy now, pay later to split your next purchase into payments? Overall, it’s a good idea as long as you’re financially responsible about your purchase and set the money aside for your installment payments.
However, you shouldn’t use BNPL to pay for overly-expensive items that you might fall behind on.
If you’re looking for emergency funds, then you may need something more than what a BNPL company can offer. If so, check out these no-credit-check loans in Canada next!