Rise of Alternative Payment Methods – Buy Now, Pay Later
With the COVID-19 pandemic and lockdown, more and more Canadians are doing their shopping online. Many retailers have pivoted towards an online model to boost sales.
The prevalence of online shopping and e-commerce has given rise to alternative payment methods known as “Buy Now, Pay Later” or BNPL. Some of the BNPL companies operating in Canada that you may come across are Affirm, PayBright, Sezzle etc, with more international players planning to launch soon.
What is BNPL?
BNPL is a point of sale financing method and is exactly like it sounds. Customers can make a purchase online but instead of paying for it upright using traditional methods like debit, credit card, interac etc., they can instead choose the option provided by BNPL companies where the payment is split in installments. The customer then provides their information for an instant credit decision, and account set-up. For example, let’s say, you want to buy a new chair for $300. Instead of charging it to a credit card, you can choose the BNPL option at checkout to make 4 installment payments of $75 each.
As more and more online retailers are adopting BNPL as a payment method, you can expect to find this option in stores selling electronics, home goods, clothes, makeup etc.
What to look out for when choosing a BNPL?
BNPL is ideal for customers who want to avoid credit card debt to purchase a big-ticket item, and who may not want to use their savings. However, at the end of the day, it is still a debt and like any other debt, you have to use it responsibly, and ensure that you are able to make the payments towards it. Splitting a $200 purchase into 4 payments of $50 seems doable but splitting $1,000 into 4 payments of $250 may put a strain on your budget.
Usually, retailers partner with only one BNPL provider. Most BNPL companies have similar claims like 0% interest, no fees, no credit checks etc. However, different BNPL providers may have different payment plans, and these plans may have different interest rates, fees and credit criteria.
The following questions will help you evaluate a BNPL.
1. What are the Requirements?
Before creating an account with a BNPL company, verify what are the requirements.
2. What are the payment plans available?
Typically, for amounts less than $1,000, the payments are split in 4; and for higher amounts, the payment schedule is longer. Some BNPL companies may require the first installment to be paid immediately, while others may defer it to later.
3. Will a Credit Check be done?
You should always ask if a credit check will be done and if so, will it affect your credit score.
4. What is the interest rate?
Most BNPLs tout a 0% interest, esp. for smaller installments. But you should still confirm if and what is the interest rate and how that translates into your payments.
5. Are there any fees? What happens if I miss a payment?
Most BNPLs tout a 0% interest, esp. for smaller installments. But you should still confirm if and what is the interest rate and how that translates into your payments.
6. Do you report to credit bureaus?
Usually, loans which are shorter than 6 months don’t get reported to credit bureaus. If building your credit is important to you, this is a valid question.
The decision to use a debit card, credit card or a BNPL provider will depend on your own unique financial circumstances and financial goals. Do your research, read reviews and evaluate the pros and cons before deciding if BNPL is right for you. Having a budget will also help you in assessing the different payment methods and making a repayment plan. Learn more about budgeting.
Finjoy Capital is not a financial advisory firm.
This article is for informational purposes only and is not a substitute for individualized professional advice.
