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What if you really want or need a product but you can’t afford it upfront? And a personal loan isn’t the right option for you right now. That’s where a buy now, pay later (BNPL) service might come in handy. 

Certain products might be a bit over your financial limit, but with a BNPL service, you don’t necessarily have to wait until your bank account has the funds to cover the purchase. Retailers are increasingly offering this type of service to help consumers get over the financial hurdle and encourage more spending, but do these services come with a cost?

Let’s take a closer look at BNPL services to help you decide whether it’s worth it to use.

What Is A Buy Now, Pay Later Service (BNPL)?

Buy now, pay later (BNPL) is a financing service that allows consumers to buy a product without having to pay for it in full. This arrangement is especially helpful when making large purchases of a few hundred dollars or more. 

Several companies offer this type of financing service on purchases made at participating retailers and don’t typically charge any interest. Some credit card companies also offer this service at lower interest rates compared to the typical variable APR charged on balances.

How Does Buy Now, Pay Later Service Work?

While each BNPL service may have its own specific set of terms and conditions, the program generally works as follows:

  • You shop at a retailer that offers a buy now, pay later option at check out.
  • You’ll fill out a quick application with your merchant’s BNPL partner who will provide an instant approval (if eligible).
  • Your first payment will be due right away and is typically 25% of your purchase price.
  • The remaining balance due is repaid in 4 to 6 installments, generally with no interest.
  • The installment payments can be made via cheque, bank transfer, or credit card.

Types Of BNPL Plans

Buy Now, Pay Later plans can take a couple of different forms, including the following:

Equal Payment Plans 

An equal payment plan requires you to make regular installment payments. Each payment amount is the same and is calculated based on the purchase price, term length, and payment frequency. 

The terms of your BNPL agreement will detail the payment amount and schedule. Payments are made until the full balance is paid off.

Deferred Payment Plans

Unlike an equal payment plan, a deferred payment plan does not require regular installment payments. Instead, you manage your payment plan on your own, as long as you repay the full amount owed by the due date.  

Can Buy Now, Pay Later Plans Affect Your Credit?

Your credit scores may be affected if the BNPL provider requires a hard credit check. However, BNPL providers usually only require a “soft” credit check, which will not hurt your credit.

Another way that your credit score may be affected by a BNPL service is if the loan is reported to the major credit bureaus. While BNPL providers don’t usually report payments to the credit bureau, they may sell your debt to a collection agency if you default on your loan. This could potentially negatively affect your credit. 

Types Of Buy Now Pay Later (BNPL) Apps

There are several BNPL platforms that are partnered with various merchants that you can use to help pay for a purchase. Here are a few currently available:

Sezzle

Sezzle 

Sezzle is a Buy Now, Pay Later payment platform that allows you to commit to a purchase without having to pay for the product or service upfront. The company offers both short- and long-term financing options. 

The short-term option allows you to make a down payment on a purchase up to $2,500, then you’ll repay the loan over 6 weeks via bi-weekly installment payments with no interest charged. With the long-term option, you can finance purchases up to a maximum of $40,000 with a loan term of up to 60 months. Interest may be charged for this option.

Paybright

PayBright 

PayBright is another BNPL company that lets you spread out your payments for purchases through bi-weekly or monthly installment payments, depending on the plan. With the Pay in 4 plan, you’ll make four 0%-interest bi-weekly payments for smaller purchases with no impact on your credit score. Alternatively, the Pay Monthly plan is for more expensive purchases that you can repay via monthly payments over 6 to 60 months, with possible interest rates applied.

Afterpay

AfterPay

Afterpay offers a BNPL financing plan that allows you to pay for a purchase over four installment payments made every two weeks over a 6-week period. You’ll need to make a 25% down payment at the point of sale, then repay the remaining balance over the loan term. 

This financing option is interest-free, however, late fees may apply for late payments.

Hidden Risks of Buy Now, Pay Later Services (BNPL)

Being able to pay for an expensive product without having to cover the entire cost upfront is advantageous for consumers. Especially for those who otherwise wouldn’t have the available funds necessary to complete the transaction.

But there are also some drawbacks to consider, including the following:

  • Doesn’t Build Credit. Making regular and timely payments on a traditional loan can help you build good credit. But buy now, pay later programs generally do not report payments to the credit bureau. Moreover, if you miss payments or default on the loan, they may sell your debt to a debt collection agency, which may hurt your credit. 
  • Interest Rates And Fees. While many buy now, pay later service providers do not charge any interest, they may charge certain fees such as late payment fees.
  • Overspending. Having an opportunity to make a big purchase without having to come up with the total price may entice consumers to spend beyond their means or encourage them to overspend.
  • No Rewards/Points. When you use a credit card, you can earn points that can be redeemed at a later date for specific purchases and expenditures. You may miss out on these benefits if you make the BNPL payments through pre-authorized payments through your bank. 
  • NSF/Overdraft Fees.  Depending on your repayment arrangement with your service provider, you may have your payments automatically deducted from your account. If you don’t have enough funds in your account when your payment is withdrawn, your BNPL service provider may charge you an overdraft or NSF fee, as will your bank. 

How To Avoid The Dangers Of Buy Now, Pay Later Services

While there may be some drawbacks to BNPL services, that doesn’t mean you can’t avoid them. Consider the following tips to steer clear of the dangers that may accompany these financial services:

  • Only spend what you can afford. It may be tempting to take advantage of a BNPL service so you don’t have to part with a large sum of money all at once. But, make sure you’re being logical and realistic with your choices. Consider your financial situation before committing to paying for a costly expenditure.
  • Set automatic payments. To avoid missing your payments, consider setting up an automatic payment system
  • Find out who the provider is. Every BNPL service provider is different, as are the interest fees that they may or may not charge. Make sure you know which BNPL provider the retailer works with before choosing buy now, pay later as your payment option.

Are There Any Benefits To Buy Now, Pay Later Services? 

There are plenty of reasons why BNPL services may be worth considering:

  • Convenient. Rather than taking out a personal loan to gain access to the funds needed to make a large purchase, BNPL is quick and easy to use. 
  • Makes large purchases affordable. You don’t have to wait until you have enough money to make a large purchase.  
  • No interest. Most BNPL services do not charge interest fees to use their services.
  • Good credit is not (always) required. Depending on the BNPL provider, you may not need a strong credit score to get approved. 
  • Fast approval. You’ll get near-instant approval when you sign up for a BNPL service. 

Alternatives To BNPL Services

A Buy Now, Pay Later service can make it easy for you to cover a large purchase if you don’t have the funds readily available at the point of sale. But there are other financing options available that you can use to cover a bigger expense, including the following:

Low-Interest Credit Cards 

There are some credit cards that offer a low-interest rate or no interest for an introductory period, which usually lasts anywhere from 15 to 21 months. In order to take advantage of these offers, you’ll need to have good to excellent credit, which means a score of at least 690. 

With a 0% credit card, you can put a large purchase on credit and pay it down before the introductory period expires. That gives you up to nearly 2 years to spend on your credit card without having to worry about paying interest on your balance.

Keep in mind that once the promotional period ends, you’ll be charged the card’s regular rate. Make sure you pay off your balance before the period ends to avoid these potentially significant charges.  

Small Personal Loans

Another option to consider is a personal loan to finance the purchase of an expensive product or service. Personal loan amounts can be as little as $500 to as much as $50,000, depending on the lender. You’ll be given a lump sum of money that you can use to cover your purchase in full, then make installment payments toward repaying your loan.

Loan terms for personal loans typically range from 6 to 60 months. If you can’t afford big payments, you can opt for a longer term to spread out your payments. And if you make timely payments toward repaying your personal loan, this may help build a healthy credit history.    

Final Thoughts

If you’re responsible with your finances, a BNPL service can be a great way to make a large purchase that you might not have the available funds to cover right away. But if your debt load is already sky-high and your finances don’t support additional bill payments. It might be best to wait until you have enough money saved up to cover the purchase in full. This way, you can avoid any financial traps that can be tough to get out of.

BNPL FAQs

Can BNPL services hurt my credit?

Applying for a BNPL service will not affect your credit if they simply do a soft credit check. However, your credit may be affected temporarily if they conduct a hard credit check. Similarly, most BNPL services do not report payments to the credit bureau, so any payments made will not help you build your payment history. However, if you default on your loan, some may sell your debt to a collection agency, which can affect your credit.  

What are some alternatives to BNPL?

You can always use your credit card to put the purchase on credit, which means the full amount for the purchase is not required right away. Saving up to purchase the item or even using a personal loan are other alternatives. 

When is BNPL a bad idea?

If your credit cards are maxed out, you don’t have the financial resources to pay the BNPL off when it’s due, or you don’t have control over your spending. Then a BNPL may not be right for you.
Lisa Rennie avatar on Loans Canada
Lisa Rennie

Lisa has been working as a personal finance writer for more than a decade, creating unique content that helps to educate Canadian consumers in the realms of real estate, mortgages, investing and financial health. For years, she held her real estate license in Toronto, Ontario before giving it up to pursue writing within this realm and related niches. Lisa is very serious about smart money management and helping others do the same.

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