Buy Now, Pay Later for Canadians: What to Know About Installment Plans

The popularity of online shopping has skyrocketed in the last year. More businesses are turning to e-commerce in order to stay open during the pandemic and the increase of online shopping has introduced new payment options such as installments payments that allow you to buy now and pay later rather than paying all at once. How exactly do installment payments work, though? Read on to find out if the concept of “buy now, pay later” is really as good as it sounds and about the risks involved in this type of payment.

What is Buy Now, Pay Later?

Buy now, pay later (BNPL) is a type of payment plan that some businesses offer for their products and services. Instead of paying for the product or service in full upfront, the business will allow you to break up that lump sum into smaller payments spread over the course of a pre-determined period of time so it can better fit your budget. There might be fees or interest charged on these plans, but the rates tend to be lower than what you would pay when using a credit card (yep, even low-rate credit cards), making them an attractive option for some shoppers.

How Do Buy Now Pay Later Plans Work?

Businesses will partner with third-party companies to offer shoppers another payment option. There are several businesses offering these services in Canada, such as Afterpay and PayBright.

If the service or product you are purchasing offers a BNPL plan you will pay the initial payment upfront to receive the item and then start paying the balance in installments. Your payment amounts, the frequency of the payments, payment method, and any fees or interest will all be pre-determined before purchase. Once the agreement is in place, it’s up to you to uphold your end of the deal and make the payments as directed or you may be charged some pretty hefty late fees.

It’s important to note that these plans work differently from business to business. Some plans may charge you a fee to set up the plan while others charge only the business itself. You may also see different promo interest rates (some as low as 0%) for a period of time but a much higher rate after. Be sure to read the fine print and understand all of the terms and conditions before signing up for a buy now, pay later plan.

What Are Different Types of BNPL Plans?

There are two main types of buy now, pay later plans offered here in Canada.

Equal Payment Plan

The Equal Payment Plan is the most common type of BNPL plan. You will make regular payments, called installments. Your agreement will specify the minimum payment required at each pay period and you will continue making those payments until the full balance has been paid off. For example, if you buy a $100 jacket you may be asked to pay it off in 4 installments of $25 every two weeks.

Deferred Payment Plan

With a deferred payment plan, there are no minimum and no pay periods. You manage the payment plan on your own but the full balance must be paid by a specific pre-determined date. For example, for that same $100 coat maybe you can afford to put $25 down one week, $50 the next, then pay off the remaining $25 the third week.

Who Offers BNPL Plans?

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Buy now, pay later plans have really taken off and are being offered by a variety of businesses across Canada and internationally as well, with more and more people turning to online shopping during lockdowns. Several Canadian businesses have spoken up and said that this payment option has helped them to stay afloat during these tough times. In an interview with CBC News, a shoe store in BC noted that those who choose to use the buy now, pay later plan actually end up spending about 25% more than other buyers. Breaking up payments into installments makes purchases easier and more alluring. Plus, most BNPL plans have better rates than those offered by credit cards.

You can get these types of payment plans for everything from technology to appliances to clothing. It’s not just for expensive items either. If you really wanted, you could get a BNPL plan for a $20 sweater.

Some popular brands that offer BNPL include: Bed Bath & Beyond, Gym Shark, Shein, Globo Shoes, Lush, and Ray-Ban. Most of these websites will advertise that they offer payment plans with, for example, Afterpay, on the home page of their websites either as a banner, or where they indicate what types of payments they accept.

How Does Payment on Installment Plans Work?

When you agree to enter a BNPL plan you are choosing to finance your purchase with credit. As such, you are entering an agreement with a financial service provider and they may run a credit check before approving you.

Once you are approved, you can set up your payments to meet the agreed-upon payment schedule. Payment methods offered by the financial service providers include:

• Pre-authorized debit transactions
• Pre-authorized credit transactions
• Retail credit card
• Personal loan

What’s the Cost of using BNPL Services?

For the most part, you don’t pay anything extra in order to finance your purchase with a service like Afterpay. PayBright notes that it can charge interest up to 29.95%, but this depends more on the retailer it’s partnered with than on your purchase. However, where BNPL services can get costly is with missed payments. If you miss a payment, a payment fails, or you reschedule your next payment too many times, then you’ll pick up some penalty fees, which can add up.

Will It Affect My Credit Score?

BNPL plans could affect your credit score. It depends on which third-party financial service the business you are buying from partners with. For example, Afterpay doesn’t run credit checks or report activities to any bureaus. PayBright, however, will occasionally run credit checks (usually for large payment amounts) which can impact your credit score. So, again, read the fine print and understand what will take place if you do decide to use a buy now, pay later plan.

Pros and Cons

Buy now, pay later is a bit of a grey area when it comes to personal finance. It has a lot of potential to be helpful, but at the same time, it can be risky if not used properly. Here are some of the pros and cons of BNPL.

Should You Buy Now, Pay Later?

In theory, BNPL seems like a great idea. It’s helping small businesses earn more and stay afloat while also allowing individuals to make purchases that they can build into their budget. In this ideal scenario, buy, now pay later can be a good payment option. You do need to be someone who is on top of their finances, knows what they can afford, and has the discipline to keep track and pay it off on time. If you can’t keep up, it could snowball into a financial problem.

If you are someone who is eyeing BNPL options as an alternative to credit card debt then you may need to rethink the purchase altogether. If you are unsure whether you can pay it off on time and it’s not essential, then wait until you can actually afford it. Your spending should never outpace the income you earn, and besides, there are other ways to save money while shopping online. Don’t put yourself in a position where you owe money before you get paid.