The use of buy now, pay later (BNPL) plans is on the rise in Canada, but experts are urging consumers to be wary of the financial consequences of using the loans, particularly for everyday purchases.
BNPL plans allow consumers to finance purchases with the use of credit, often at the point-of-purchase without having to apply for a credit check. BNPL plans are essentially short-term loans that can be paid over time, often over a few weeks, and typically at a zero per cent interest rate. Penalties kick in if you miss a payment, and can impact your credit score.
According to the FIS WorldPay's Global Payments report, BNPL represented approximately 6 per cent of all e-commerce payment methods in Canada in 2022, double the amount of BNPL e-commerce spending in 2021.
"Canadian consumers' appetite for credit is… fuelling the adoption of buy now pay later (BNPL)," the WorldPay report said.
Brigitte Goulard, the co-head of the Consumer Protection and Fintech group at Torys LLP and former deputy commissioner of the Financial Consumer Agency of Canada, says part of what has contributed to the rise of BNPL is that it makes borrowing "so easy."
"It can make it very easy to borrow money, without giving the chance for consumers to consider the consequences of entering into that commitment," Goulard said in an interview with Yahoo Finance Canada.
"It's always been easy with credit cards, but BNPL gives the impression that it's almost free money in a sense, which is not the case."
While short-term loans are nothing new, how BNPL plans are being deployed and used by consumers is different today, says Doretta Thompson, financial literacy lead with the Chartered Professional Accountants of Canada.
"Buy now, pay later has been around for a very long time. What has changed is the digitization of it, and now you have people taking out small loans for minor purchases," Thompson said in an interview with Yahoo Finance Canada.
"There are penalties if you miss a payment, and those payments can add up… It can be the beginning of a slippery slope when people are using them for small, everyday purchases."
It can be the beginning of a slippery slope when people are using them for small, everyday purchases.”Doretta Thompson, CPA Canada
The rapid rise of BNPL, particularly through the COVID-19 pandemic, prompted the Financial Consumer Agency of Canada (FCAC) to launch a pilot study into the service in 2021. Although the survey was not statistically significant due to its small sample size, FCAC noted that BNPL users tended to be younger, with the largest group being between 18 and 44 years of age.
The survey found that 42 per cent of respondents used BNPL "to help me budget", 39 per cent say they couldn't afford the entire purchase right away, while 23 per cent used it to avoid interest and fees.
"For those who participated in follow-up interviews, a common motivation for using the service was that it made payments more manageable, and sometimes helped bridge a 'timing gap' where a sudden need or opportunity arose and the user did not have the funds available at the time," FCAC wrote.
While there are limited recent data in Canada about how BNPL plans are being used, new data from the United States could provide a clue into consumer habits when it comes to these short-term loans. A recent study from the U.S. Consumer Financial Protection Bureau says the average loan amount for BNPL plans is $135 over six weeks, compared to $800 for traditional loan instalments over a period of between eight and nine months. The report also found that "BNPL borrowers exhibit measures of financial distress that are statistically significantly higher than non-users," adding they often have higher credit card debt and a greater likelihood of having an overdraft.
Goulard says the BNPL space is an especially important one to watch, given inflation and the rising cost of living.
"It doesn't foster a culture of budgeting. It fosters a culture of spending," Goulard said.
"If you're organized and you always pay on time, then it's a good product that allows you to pay in instalments without having interest or fees. If you're not disciplined, it's not a good product."
How to approach BNPL
Barry Choi, a personal finance expert, says a risk with BNPL plans is that consumers may end up spending more than if they were paying off the purchase in one lump sum on their credit cards.
"There's nothing wrong with using these plans, as long as you're always paying off the full balance when it's due and you're meeting those terms," Choi said.
"Like anything else, be it a credit card or other loan, you want to read the terms and really understand what you're getting into. And if you're finding yourself shopping more than you would without it, maybe it's time to close your account."
Thompson recommends consumers find ways to add friction into their online shopping experience, something that is largely eliminated with the ease of payment methods including BNPL.
"What they are doing is making it fast and easy to make a purchase decision. So add as much friction back into the transaction process and that's a really valuable way to cut back on your spending," Thompson said.
Thompson recommends not saving your credit card information into your browser, eliminating the ability to make a purchase in one click. She is also a proponent of waiting 24 hours before making a purchase.
"Slow down your buying decisions," she said. "And make sure your purchases align with your budget and your ability to pay."
Alicja Siekierska is a senior reporter at Yahoo Finance Canada. Follow her on Twitter @alicjawithaj.