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Buy Now, Pay Later – Good or Bad Idea?

The eCommerce surge during the pandemic nudged many Canadians into buying online. The “buy now, pay later” concept isn’t new, but the idea is surging to new heights. Last year, research projected a 63% annual growth rate in Canada. The industry boom has just begun based on a recent report from the Financial Consumer Agency of Canada. So far, only 34% of Canadians know about BNPL, and only 8% used the option between September 2019 and March 2021. Compare that to the UK, where over 30% have used BNPL and the US, with over 40%.

However, experts wonder if Buy Now, Pay Later is a good idea for most consumers compared to other payment options.

What is buy now, pay later (BNPL)?

Buy Now, Pay Later (BNPL) is short-term financing that allows you to receive items and pay for them in the future, often interest-free. These point-of-sale installment loans are prevalent in online shopping.
Installments have been around for a long time for larger purchases, like furniture and appliances. Now, retailers offer a point-of-sale option for smaller purchases. Many routine items like clothes, shoes, household essentials or cosmetics have a buy now, pay later (BNPL) option. Even Air Canada has a BNPL option called Uplift.

How does it work?

Every program has unique features, terms, and conditions. However, most point-of-sale BNPL loans have a few things in common:

  • You opt for the Buy Now, Pay Later option at checkout
  • Your approval takes only seconds
  • You make your down payment, usually 25% of the total
  • Then, you make three or more (typically interest-free) regular payments from your bank account or credit card

Some retailers set up a Buy Now, Pay Later platform, picking up most of the fees, so you pay less or 0 interest. Yet, plans vary, depending on which platform they use.

Do BNPL payment methods accrue interest?

Many are interest-free, but not all. Retailers are more likely to use third-party platforms with low or 0 interest like:

  • Klarna
  • Affirm
  • PayBright (owned by Affirm)
  • ZIP
  • Afterpay
  • Sezzle

However, banks offer similar options. For example, the CIBC Pace It platform lets you stagger payments on charges over $100 for 6, 12 or 24 months. While not interest-free, the rates are lower than the unpaid balance on your credit card. Scotiabank has the SelectPay program, but you pay a monthly fee instead of interest.

No matter which app you choose, from your bank or retailer, make sure you read the fine print before signing up.

Does it affect your credit score?

A Buy Now Pay Later point-of-sale payment method usually doesn’t affect your credit score. Most platforms perform a soft credit check when you apply, which does not affect your score. However, there is one situation where it will. Late or missed payments are sometimes reported and can damage your credit score.

  • Some platforms report to the credit bureaus. So, that information shows up on your credit reports and affects your credit score. If you want to build your credit, you can opt-in to credit bureau reporting with an upgraded account on the Sezzle platform. By making your payments on time you can better your credit score.
  • Other platforms, like Afterpay, never report payment history to the credit bureaus. So, using their BNPL platform will not affect your credit score.
  • There are monthly payment subscription options, like PayBright’s, that do hard credit inquiries. These will show up on your credit report and can affect your credit score.

Should I avoid buy now, pay later?

BNPL works well in some situations but can be a debt trap for some. You may qualify for a point-of-sale installment loan but not qualify for a credit card. This can be an effective way to budget or build your credit. On the other hand, if you make late or missed payments, it affects your credit.

Deferred payments can become a debt trap

Probably the most crucial consideration is the potential to overspend. Does the promise of interest-free installments encourage impulse buying for you? BNPL payments can add up, especially when you have other payments due. Also, be very careful to set up automatic payments or mark the due dates on your calendar. It’s easy to have a payment date slip by, and you forget to pay.

The whole reason retailers set up interest-free installments is to reduce the barriers to spending more. Cardholders get 0 interest financing options without signing up for a new service. Offering payments increase both the average total purchase and shopping cart conversion rates. The thing is, what’s good for business can be bad for wallets if you don’t manage your finances well.

Buy now, pay later vs. layaway

Remember when you went into Zellers in July, picked out your school clothes, and your mom put them on layaway for September? It would have been before they brought out the Zellers credit card because layaway went out of fashion. Turns out that things coming back in fashion isn’t just a fashion industry phenomenon. Some smaller stores brought layaway options back during the recession in 2008.

Layaway works the opposite of Buy Now, Pay Later. With layaway, the store puts the items aside for you, but you pay for them in full before you take them home. You never borrow any money.

With Buy Now, Pay Later, you sign up with a third-party lender (not the retailer), make one payment and the store ships your items to you. Then, you pay the rest of the installments after you have your items at home.


Buy Now Pay Later (BNPL) loans continue growing, especially in online shopping. You can make interest-free installments from your bank account with 0 interest or low-interest rates over a few weeks or months. The third-party BNPL platforms usually perform a soft credit check making it less likely to affect your credit score. Late or missed payments are often reported to the credit bureaus, just like your credit card.
On the other hand, you can use this payment option to build your credit.

In the end, it’s all about knowing the risks so you can mitigate the pitfalls. If navigating the downfalls of BNPL doesn’t seem like something you can manage easily, then steer clear.

If you are looking for more ways to build your credit and pay off your credit cards, talk to one of our trained Credit Counsellors for a free assessment. We’ll help find the right debt relief solution for you!

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