Buy now, pay later: what to know and what to avoid
Woman shopping at a store

Buy now, pay later (BNPL) has become very popular in the last few years as both retailers and credit card providers now offer the option. Think of BNPL as another way to finance your purchases with credit - as the name implies, you’re buying it now, and you’re paying later.

Buying things on credit is nothing new, but BNPL plans differ slightly from traditional credit cards. When choosing a BNPL plan, you’re agreeing to make your purchase in instalment payments. While the appeal of BNPL is obvious, there are a few things you’ll want to be aware of before you decide to go down that route.

How buy now, pay later plans work

BNPL is simply another financing option that’s available from retailers (via a third party) or a financial institution. Even though BNPL plans are similar, they have some minor differences. In most cases, you’ll want to look out for the following:

●      Administrative fees

●      Payment amounts

●      Frequency of payments

●      Number of payments

●      Interest rates

●      Payment method 

For example, let’s say you’re making a $200 purchase, and the retailer has a BNPL plan where you’ll make four equal payments every two weeks at 0% interest. That means you’d pay $50 every 14 days until the balance is paid off. If you miss a payment, interest charges would apply.

With retailers, they’re partnered with BNPL providers that give you access to credit. As a consumer, you’d create an account with these BNPL providers first. You’d then be able to use their financing option when making a purchase and participating retailers.

When it comes to credit card BNPL plans, you’ll be able to select specific purchases to be financed over multiple payments. Depending on the terms of the plan, you’d be able to stretch out your payments with no or minimal additional interest charges.

Types of buy now, pay later plans

There are two types of buy now, pay later plans that you need to be aware of. What’s available to you depends on the BNPL provider.

Equal payment plans

Equal payment plans are the most common BNPL plans. You would make payments in instalments based on the terms of your agreement.  This type of plan is popular since the amounts are usually automatically withdrawn from your account.

Deferred payment plans

With deferred payments, you must pay the full balance by a certain due date. Generally, there’s no minimum payment amount, so it’s up to you to ensure your debt is paid on time.

How do payments work for buy now, pay later plans?

BNPL plans are essentially another form of credit. The retailer is allowing you to take the item home now - you just need to make your payments on time. To ensure you’re credit worthy, retailers / BNPL providers will usually do a credit check before approving you.

Once you’re approved, you would decide what payment methods are best for you. Generally, you’d have the following options available: 

●      Pre-authorized debit transactions from your bank account

●      Pre-authorized credit transactions

●      Retail credit card

●      Option on your existing credit card

●      Personal loan

Assuming you’re making your payments on time and there’s no fee, BNPL plans can help you manage your money. For example, let’s say you need to make a purchase of $500. The BNPL plan is structured to be four equal payments every two weeks. That means you’d have about two months to pay off the balance. With credit cards, the interest-free grace period only lasts 21-28 days.

That’s not to say BNPL plans are better than credit. It’s just another option you have available.

Pros and cons of buy now, pay later plans

Buy now, pay later plans may sound great, but it’s not that simple. It is another form of credit, and you could go into debt if you don’t manage your finances well. When considering BNPL plans, it’s best to consider both the pros and cons before making a decision.

Buy now, pay later pros

●      Easy payment plans - Since payments are spread out, you can manage your cash flow easier.

●      Low interest rates - The interest rate on BNPL plans are usually lower than personal loans and credit cards.

●      Lots of competition - There are many different BNPL providers, so you can compare.

Buy now, pay later cons

●      You may spend more - BNPL plans could encourage you to spend more.

●      Potential high interest - If you miss one payment, high interest rates may kick in.

●      Fees may apply - Not all BNPL plans are free, so you could spend more in the end.

Are buy now, pay later plans worth it?

It sort of depends. At face value, BNPL can help you out in a jam. You can make equal payments over a long period of time. This can be vital if you have an essential purchase coming up but don’t have the funds to immediately pay it off. However, since it’s so easy to take advantage of BNPL plans, it encourages many people to spend more.

Barry Choi is a Toronto-based personal finance and travel expert who frequently makes media appearances. His blog Money We Have is one of Canada’s most trusted sources when it comes to money and travel. As a completely self-taught, do-it-yourself investor with no formal training, he makes money easy to understand for all Canadians. His specialties include personal finance, budget travel, millennial money, credit cards, and trending destinations.

Barry Choi is a paid spokesperson of Sonnet Insurance.
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