Buy now, pay later (BNPL) plans are soaring in popularity, offering the appeal of instant gratification without the immediate financial pinch.
You only need to look at the rise in consumer credit debt in Canada to see how strong the temptation is for many people to get what they want now and pay later, according to a report from Statistics Canada. As of the third quarter of 2023, he owes $113.4 billion in credit card debt alone, according to Equifax Canada.
However, beneath their convenient and flexible surface, these BNPL programs hide several pitfalls that can trap unwary consumers in a web of financial complexity.
Buy now, pay later: the basics
These programs are very simple. This allows consumers to split the cost of a purchase into smaller payments, typically four biweekly payments. Some programs also offer the opportunity to finance your purchase with monthly payments (although these repayment plans usually come with significant interest charges).
For example, if you purchase a $200 pair of shoes using BNPL, you’ll pay the first $50 upfront and get an additional $50 debited every two weeks until the remaining $150 is cleared.
Some of the largest BNPL companies in Canada currently include Klarna, PayBright, Sezzle, and Afterpay, just to name a few.
good things
Like credit cards, BNPL programs are often criticized. However, just like with credit cards, the problem is not necessarily with the program, but with its irresponsible use. Credit cards are great tools when used responsibly, but when used irresponsibly they can leave you mired in debt.
Before diving into some of the pitfalls of the BNPL program, it is only natural to mention its benefits.
In other words, BNPL allows you to finance purchases that would otherwise be difficult to finance and break them down into manageable parts. With the 4-payment plan, you also pay no interest. There is a small processing fee, usually less than $2.
This gives BNPL a significant advantage compared to credit cards, which charge monthly interest on balances that carry over to the next billing cycle.
This is very useful when dealing with urgent purchases, such as buying a new laptop for work/school or replacing a broken tool needed by your small business.
bad person
Now let’s take a look at some of the not-so-great aspects of BNPL.
May cause a debt spiral
While BNPL is certainly useful for buying essentials, many users use programs like Klarna and PayBright to spend beyond their means on more frivolous purchases.
BNPL programs cleverly remove immediate financial barriers to purchases that can tempt consumers into spending more than they can afford.
This illusion of affordability can lead to impulsive purchase decisions, and the cumulative effect of multiple BNPL commitments fosters overconsumption habits.
This can lead you into a deceptive comfort zone where it is easy to pile up debt under multiple BNPL companies and things go downhill.
Each new purchase adds to the financial obligation, potentially creating a scenario where the total monthly payments exceed the consumer’s ability to pay.
For this reason, many BNPL programs impose maximum borrowing amounts. First-time users are usually not given a large allowance, perhaps only $200 to $300 at most. Then, as you build a good payment history and use it more frequently, the maximum amount you can borrow increases, just as your credit card limit increases.
hidden risks and costs
BNPL programs often tout zero interest as a selling point, but missed payments can result in hefty fees and, in some cases, high interest rates that can quickly rise.
Unlike traditional credit models, where terms and conditions are highly regulated, BNPL contracts can catch consumers by surprise due to their penalty structure. This can turn a short-term convenience into a long-term financial burden.
Consumer protection concerns
The BNPL sector operates in a relatively loose regulatory environment compared to traditional lending and credit services. This lack of oversight can leave consumers vulnerable to conditions that are not necessarily in their best interests.
Consumers are often fooled by the simplicity of the “pay later” promise and get caught up in repayment plans they don’t fully understand.
Actual terms, such as penalties for missed payments and details of accrued interest, can be obscured by marketing, which could lead to unpleasant surprises down the road for some users.
How does BNPL affect your credit?
Most BNPL programs do not perform hard credit pulls. First, the BNPL company may run a “soft” credit check to make sure you don’t have a bad payment history. However, soft credit checks do not directly affect your credit score.
That being said, BNPL can affect your credit.
If you repeatedly miss scheduled payments or have your debts sent to a collection agency in arrears, the BNPL program will place a negative mark on your credit report, potentially worsening your score for months or years to come. there is.
Another drawback of the BNPL program is that it never positively impacts your credit. You can make all your payments on time, but they won’t show up on your credit report. Personal loans have distinct advantages in this area.
What is the best alternative to BNPL?
The best alternative to BNPL is to use a layaway program. Many stores offer to hold items while customers gradually reduce their payments. This way, by the time you receive your item, your payment has already been made.
We also recommend building an emergency savings fund. That way, you won’t have to worry about financing with credit cards or his BNPL program to cover the cost of unexpected items.
Tired of living check to check? Keep reading for my step-by-step guide to building a strong financial foundation for yourself.
Christopher Liew is a CFA certified and former financial advisor. He writes personal finance tips for thousands of Canadian daily readers on his Wealth Awesome website.
Have a personal finance question, tip or story idea? Email us at dotcom@bellmedia.ca.
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