Often, if you are approved for credit, you can pay for your purchase in installments. These are convenient ways to make purchases when you need them, but they also have some disadvantages.
How BNPL Plans Work
Buy Now Pay Later plans are a popular way to make purchases these days. Many retailers, credit cards and websites offer this service. In today’s era of technology, approval for these plans can happen in just minutes.
Depending on the type of plan you choose, you may need to put down a deposit. In other cases, you may have an allotted amount of time to pay off the purchase in full, interest-free. After that, though, the interest rate is really high.
Why Do Companies Offer BNPL?
The Buy Now Pay Later plan, also referred to as Point of Sale (POS) installment loans or retail financing plans, is becoming increasingly popular as a payment option for businesses. Fun fact: BNPL actually accounts for 5% of all e-commerce purchases. This is because, as long as they make the payments in the correct amount of time, the consumer can pay off the amount owed without paying any interest.
The idea of BNPL may seem like a way for businesses to lose money, but in reality, it actually does the opposite. BNPL can actually help you get more customers. It allows those customers who didn’t have enough funds up front but still want to make the larger purchase.
It avoids the high interest rates on a credit card, making it similar to paying cash. It also allows the company to build a partnership with the BNPL company. Plus, if the interest-free payments aren’t made on time, the customer will have to pay interest on the item.
How BNPL Programs Make Money
Since BNPL plans are usually interest-free if paid within the allotted time, you may be wondering how these companies make any money. Well, the answer is actually pretty simple: transaction fees. For every transaction, the company has to pay a transaction fee. This is usually 3% to 6% of the purchase price.
BNPL Companies in Canada
When it comes to finding Buy Now Pay Later companies in Canada, there are quite a few to choose from. They can all be used for different things.
Apple Pay Later
This program allows users to access BNPL financing for purchases between $50 and $1,000. You can pay in four equal installments with no interest and no fees. To do this, though, you need to set it up and apply it using the wallet app.
For every purchase you want to make with Apple Pay Later, select that option. Then you will be shown your loan agreement, which you can sign and see a breakdown of your payments and when they are due. These payments will automatically be charged to the debit card you added for this feature.
Afterpay
Another BNPL provider is Afterpay. This one is pretty simple to use; all you need to do is download the app, then create an account. Once you do that, you can start shopping. After selecting what you want to purchase, you then select Afterpay as your payment method. The first of the four payments will be made at the time of purchase, and the remaining three will be made over the next 6 weeks.
When you sign up for Afterpay, all you need to provide is your:
- Name
- Phone number
- Address
- DOB
- Debit card
They also have a feature that lets you see your spending limit, and as you make your payments online, it will gradually increase. They also send you reminders when your payments are due. If you miss your payments, your account will be paused until you’re caught up.
Klarna
The Klarna BNPL service is similar to Afterpay’s. How it works is you shop through their website or the app. They are partnered with some of the top retailers worldwide. By using this service, you can split your payments over time.
The first payment is made at purchase; the remaining balance is collected every two weeks thereafter. As long as you make the payments on time, there are no fees. As long as the money is in your bank account, a bank transfer will be made on the day your payment is due.
Paybright
Paybright markets itself as one of Canada’s top BNPL payment plans. They partner with many top brands and allow you to split your payments into biweekly or monthly installments. When you apply, only a soft credit check is done, so there is no impact on your credit score.
Depending on the type of purchase you make, you can split the amount into 4 equal payments with no interest or fees. Otherwise, you can create a monthly payment plan ranging from 6 to 60 months, starting at 0% interest.
Sezzle
Another one of Canada’s most popular BNPL companies is Sezzle. First,t you sign up, then you shop, and select Sezzle as your payment method. If you select the BNPL payment plan, you can split your payments into 4 equal amounts over 6 weeks. What differentiates Sezzle from other BNPL services is that it reports your payments to the credit bureaus. This is ideal for someone looking to build their credit score.
Flexiti
Flexiti works a little differently from the other BNPL providers. They are essentially credit cards partnered with different companies throughout the country. How it works is you apply for the credit card. You will then receive an approval with a credit limit. This credit card allows you to make purchases up to that credit limit.
The amount of time you have to pay off the amount you owe interest-free depends on the advertised promotion at the time. There are usually several timelines to choose from, ranging from a few weeks to years. Some of these have no fees, while others do charge additional fees for the service. You then add Flexiti as a payee through your online banking, and you can make the payments whenever you choose. This is ideal for those making large purchases but want to make flexible payments. What you should keep in mind, though, is that if you make late payments, you will then have to pay a higher interest rate than most traditional credit card companies. Either way, until it’s paid off, it’s still considered credit card debt.
The Downside to BNPL Programs
While BNPL transactions are great for those with low credit scores, not all of these options build credit. You can also miss out on some great rewards and points that traditional credit cards offer. BNPL loans are also considered to be consumer debt, so if you have missed payments, you could incur high fees, and they often charge interest.
You may also have to deal with a collection claim that can negatively affect your credit history. If you are already dealing with lower credit scores and a lack of credit history, this could make getting any type of financing even more difficult.
With the convenience of these plans, it’s also very easy to overextend your finances. Not having to worry about payments right away can make it easy to delay them. Before you know it, you owe extra money, and many of these companies charge fees that are more than a traditional loan or credit card.
Late fees for missed payments can add up to far more than you anticipated. Your total purchase amount will keep growing, and you will have to find a way to pay it off.
Buy Now Pay Later and Your Credit Report
With most Buy Now Pay Later lenders in fintech lending, a soft credit check is done to approve you for the point of sale financing. However, these micro-loan services aren’t always reported to the credit bureaus, since reporting isn’t always required.
That said, if you don’t make your payments, there will likely be a late payment penalty as well as a hit to your credit score. The more late payments you have, the more you’re going to notice the impact on your credit score. The same thing will happen if you default on the loan, whether the lender reports your positive payments to the credit bureaus or not.
Is BNPL Safe for Online Shopping?
While BNPL plans are generally safe for online shopping, you should research the lender to confirm they are legitimate. It’s also a good idea to compare payment plans to determine the best rate. In fact, some of these lenders offer interest-free purchases with a biweekly payment schedule.
While using these platforms is generally safe due to high-level encryption, the convenience of checkout financing can make it difficult to stay within your spending limit. In fact, digital wallet financing and retail financing pose a greater risk of impulse purchases and are known to lead to overspending and even holiday shopping debt.
Returning Items Paid for With BNPL
According to BNPL regulations, you can return items. However, according to the return policy, BNPL plans will process the refund. While there are no specific consumer protection laws, the BNPL processes the refund to account for any deferred payments and unpaid balances.
Missing a BNPL Payment
While some people use BNPL plans as credit-building tools, their credit impact can be negated by any missed payments. Along with a credit score hit, there’s also a missed payment penalty you need to consider. This fee is in addition to any payment plan fees you might have.
If you catch that you missed a payment right away, you should log into your Buy Now Pay Later app immediately. Many digital lending apps specify whether there is a grace period for late payments, allowing you to make the payment without penalty or risk losing your interest-free loan.
Is BNPL Better Than a Credit Card?
While both credit cards and BNPL products serve as short-term loans, there are some differences between them. While BNPL plans and e-commerce financing have no hard credit checks and often run for a set period, they do have deferred interest. If you don’t make all of the payments on your installment payment plan, you could end up with more transaction fees or other fees.
With credit cards, you still have the overspending risk, and responsible borrowing is key, but they’re a great way to improve your credit history. They also offer rewards and other consumer protections that online checkout loans and other flexible payment options don’t. They also offer purchase protection.
Another thing to consider about your credit card bill is the interest. While it may seem like you have manageable payments, you’re looking at much longer payment plans than the short-term credit option of BNPL. This is because your monthly payments hardly cover more than the interest charges and are reusable, so you can continually buy things and make impulse purchases, even if you can’t afford them.
How Many BNPL Loans Can You Have at Once?
In Canada, there is no legal limit on BNPL plans. That said, it’s important to use BNPL responsibly. Even if you have good credit, smaller payments, and have set up automatic payments, these can add up and impact your cash flow before you know it. At the end of the day, BNPL options are still a credit product.
If you run into situations where you can’t have more than one, it’s usually just a restriction with the lender. Even though these products offer easy payment options, the total amount for the specific purchase may be high. There could also be a risk to your budget in the fine print if you’re unable to make the payments.
BNPL Regulations in Canada
While BNPL loans are a helpful tool, they differ from other forms of financing, so their regulations are slightly different. In fact, they’re regulated by provincial consumer protections as well as the federal criminal code, which caps interest rates at 35%.
