Financing Purchases: When is This a Good Plan?

Buy Now, Pay Later — the Traditional Way

As Canada celebrates Financial Literacy Month, we would like to delve into the concept of Buy Now Pay Later (BNPL) and its growing popularity among consumers in Canada.

Back in the day “Buy Now, Pay Later” was a selling feature used almost exclusively by local furniture and appliance stores for large ticket items and it is still a common retail credit service. If your fridge breaks down and you don’t have an emergency fund; you might take advantage of the “buy now, pay later” option.

Usually with this plan, you don’t ‘pay a cent’ for a varying period of time — six months, a year, two years. The catch is that you are required to pay the full amount by the due date. If you do not pay the balance before that date, all the interest and penalties from the ‘don’t pay a cent’ term are added onto your debt. Generally, the interest rates on this kind of retail financing plan is substantially higher than a loan or line of credit at a bank or credit union.

Paying Off the Debt On the Due Date

As convenient as this feature is, it is often not a great plan for many people. If you decide to utilize the buy now, pay later option, you need to be absolutely sure that you will have the funds needed to pay off the debt on the due date. If you don’t, the cost of your purchased item increases exponentially with interest and penalties.

For most of us, we cannot count on a windfall, so we would need to set aside monthly payments for the entire term, so that we could pay the debt off before the ‘added costs kicked in. That sounds easy enough until someone gets sick, loses a job, or just gets overwhelmed with the increased cost of living.

That being said, if you have an emergency, like that broken down fridge, and you do not have the funds to replace the fridge, the buy now, pay later option can be a life saver. You just need to be disciplined from day one in budgeting for the required final payment.

LayAway

LayAway is another way you can make payments on an item. It is not very often that you hear this term anymore, but a few smaller stores still allow you to use this option. With LayAway if you want to purchase an item but do not have enough money, you could put down a deposit and then make regular payments until the item was fully paid for.

Once the item is fully paid for, you are able to leave with your purchase. You do not get to take the item until it was paid for. Obviously, there is a built-in risk in this scenario — if you never manage to pay the full price, will the retailer return the money you’ve paid to date? It would be wise to find that out before you enter into a layaway plan.

The New Buy Now, Pay Later (BNPL)

These days BNPL (the cool acronym for Buy Now, Pay Later is done differently. BNPL or POS (Point of Sale Installment Loans) took off during Covid in other parts of the world, such as the USA, and the UK. Only more recently has Canada jumped on the micro-financing bandwagon, particularly since there are now a handful of BNPL lenders in our marketplace.

BNPL is used generally for on-line purchases. Purchases do not have to be large, like a couch or a fridge, rather the purchase can be small, like makeup or air pods. How the terms are generally set up these days, is the payments are broken up over four installments over a period of time — usually six weeks. The first payment of 25% is due at the time of purchase. The interesting thing is there is no interest. You heard me correctly, no interest, rather, the retailers pay the lenders a retailer fee.

Now, there are consequences if you miss a payment; they can charge late or missed fees or surcharges, they can report you to the credit bureau and they can stop you from using the service in the future. Retailers are ok with paying the fees to these small loan lenders, as BNPL entices buyers to buy more. When filling their on-line carts, buyers are looking at the small payments they will have to make, not the total amount due at the end of the period, which normally is not all that far in the future.

Advantages of BNPL

Now there can be some advantages to BNPL. Say you need a new laptop and do not have the time to budget in order to save up for said laptop. If you were to put the laptop on your credit card or through a financing plan you would be charged interest. With BNPL, assuming you have the cash flow to cover four easy installments over the next six weeks, you can have the laptop with no interest. You actually receive the item being purchased before it is paid for.

Another advantage to BNPL, is that these micro financing companies generally report to the credit bureau, so paying back these loans as per the contract can help you build your credit rating.

Consider Carefully Before You Purchase

With Buy Now Pay Later, regardless if you are in the market for a major purchase like new appliances or a small scale like a new bottle of fancy perfume, the concept is still the same. The deal is only a deal if you are able to budget and make the payments when the payments are due.

The downfall happens when you can’t make the payments — be it interest, surcharges, missed fees or reports to the credit bureau, the outcome is still the same regardless of the size of the purchase.

Because of that risk, everyone needs to consider carefully whether the purchase is a need or a want. Just because retailers have made it easier to buy an item, paying for it is still the challenge. It is always best to ensure that the money is allocated to repay those purchases at the time the purchases are made.

As we celebrate Canada’s Financial Literacy Month, it is crucial to understand the benefits and potential risks associated with Buy Now Pay Later services.

If you find yourself struggling with any of these buy now pay later plans, talk to a Licensed Insolvency Trustee. LCTaylor is local and we are always available to help you find a solution. Contact us today for a free consultation.

Originally published at https://lctaylor.com on November 1, 2023.