For some Canadians the Buy Now Pay Later (BNPL) option can be a viable way for a purchase or credit when you don’t have the necessary funds available. This type of credit has regular scheduled payments that you can bank on and make work with your budget.
The emergence of BNPL has emerged from consumers’ demand for choice. BNPL has been around for a while, but what was once typically reserved for big ticket items now allows for more accessibility for smaller purchases as well. It’s becoming a preferred option and allows people to make use of it for things like apparel, electronics, concerts and more.
While BNPL and personal loans have some similarities, there are some clear differences too. We explore these along with what you should know to help you determine what might be the better choice for your own situation.
What is Buy Now Pay Later?
As the name suggests, a Buy Now Pay Later plan is a way to afford something over a series of scheduled short-term installment loan payments. This type of loan is usually used by people with lower incomes or credit scores and typically for retail items like household goods, electronics and more. It can just be an easier way to pay. By dividing the payments into smaller amounts, a purchase can be more affordable as opposed to paying the amount in full, or if the person doesn’t have a credit card to use.
The Buy Now Pay Later model has appeal for many, with some popular reasons being;
- To make a purchase that doesn’t fit their budget
- Borrow without credit check
- Dislike using credit cards
- Can’t get approved for credit cards
- Avoid paying credit card interest
- Protect personal data
- Do not have a bank account
For example, you wanted furniture or something now but currently don’t have $500, or a credit card. If your credit score is poor and you don’t qualify for a personal loan, then Buy Now Pay Later can be an alternative for some.
Buy Now Pay Later vs Personal Loans
BNPL has a number of advantages, and that’s part of their appeal. They generally don’t require a high credit score, making them appealing to people with a poor credit history. Many have no interest on the payments, unlike credit cards or personal loans, but this doesn’t apply to all.
On the other hand, most Buy Now Pay Later won’t help your credit score. Many don’t report your on-time payments. But most will report your late payments, which will undoubtedly impact your credit score. There can also be penalties for late payments too.
Many online retailers prominently display Buy Now Pay Later options in the checkout or near the ‘add to cart’ button to boost sales. But BNPL can entice you into spending money that you don’t really have. For some the idea of smaller monthly payments makes that ‘want to have’ item within reach, but this can lead to carrying a balance beyond their means. If overused, that can quickly lead to debt that can be a problem.
With personal loans, you might have more flexibility. The repayment terms can be longer, which can lower your monthly payments costs. Plus your payments are likely reported, helping you to build your credit score.
If you’re borrowing and your repayments don’t help your credit score, you have to wonder if it’s the right option to use. Building a credit score isn’t easy or quick, so every little option to influence it in a positive way should be explored. At some point (and possibly more than once) you will probably want to borrow a large sum of money. It could be for a car, or even a house, or maybe a loan for home renovations some day. Either way, when you borrow a large sum you want the best possible rates as a few percentage points can mean thousands of dollars in interest.
Alternatives to BNPL
If a personal loan isn’t an option and wondering about BNPL, there’s a few choices that one might consider which can be comparable or even better.
Saving up for something should always be a first consideration when you don’t have the funds currently available. It might take some time, but costs less since there’s no interest or fees involved.
If you have a credit card then this is always a good option used by many. Depending on your credit card you might also benefit from rewards or cash back as well.
Personal loans might be one of your best alternatives to BNPL if saving or credit cards do not look like they might be options for you. Ultimately, you would be the best judge of what’s going to be the right choice, but a personal loan looks to be one for many.
According to the Chartered Professional Accountants (CPA) association of Canada use of BNPL can result in consumers buying more, as stretching out payments into affordable instalments makes things seem more affordable. At the same time, this also makes for more debt, falling behind on payments, and possibly hurting your credit score.
Some of the more popular BNPL services in Canada include PayBright, AfterPay, Sezzle, Klarna, Affirm and more. Even banks like ScotiaBank and RBC have moved into the Buy Now Pay Later space through partnerships.