If you’ve purchased anything online in the last little while, you’ve probably noticed an option to use a third-party service that lets you settle your bill in a series of smaller payments without charging you any interest.
These ‘buy now, pay later’ (BNPL) services have been surging in popularity, especially among younger shoppers. A few common names include Afterpay, Klarna, PayBright, and Sezzle, but plenty of others are out there, including some from Canada’s big banks.
While each service has its own set of rules, they all do the same thing: help buyers break up the cost of big purchases into smaller, more manageable chunks.
How does BNPL? work?
Let’s say you want to buy a new TV that costs $600. Instead of paying the full price, you might pay 25 per cent, or $150, on the spot, then another $150 every two weeks for the next six weeks until you’ve paid the bill in full.
Make your payments in a timely fashion and you won’t face any interest charges. Some BNPL services charge their users a fee, while others are free as long as you don’t miss a payment.
Avoid the temptation to overspend
BNPL may sound convenient and simple, but don’t forget that it’s just a different kind of debt. Some shoppers say using BNPL to set up a payment plan for sizable online purchases is their preferred way to budget, helping them track their spending across weeks and months. For others, however, it’s the opposite: splitting big bills into smaller payments creates the illusion of additional wealth and diminished costs, leading to the potential for out-of-control spending and deep debt.
No matter how you plan on paying for something, an important rule is to only spend what you have. If money is too tight to afford that new TV, whether it’s with one big payment or four smaller ones, better to put the purchase on hold until you have the savings to be able to truly afford it.
BNPL isn’t always the best way to build your credit score
You might think buying items with a BNPL service and always paying your bill on time would boost your credit score, like it does when you pay your credit card bill by the due date. Unfortunately, however, that’s not the case with most basic BNPL services, although Sezzle does offer an option that gives your payment history to credit bureaus. By and large, however, BNPL services aren’t much use for those looking to boost their credit score.
Always read the fine print
Different BNPL services have different terms, and it’s important to know what the consequences are for missed or late payments before you sign up. Some services will ding you with fees or hefty interest charges if you’re more than seven days late with a payment, while others will simply suspend your account until the debt is settled.
Another fine print issue to be aware of: how your BNPL service handles what you owe when an item you purchased needs to be returned. Take a careful look at the agreement for your service, and don’t be afraid to reach out to their support site if you have questions or concerns.
What alternatives are there?
If you’re unsure or uneasy about using a BNPL service, there are other ways to handle the cost of a big purchase without needing all the cash up front. Personal loans charge interest, but let you spread the repayment over a much longer period. A line of credit also charges interest but gives you revolving access to cash as you need it, as long as you keep paying back what you borrow. Finally, a low-interest credit card can boost your purchasing power while helping you build your credit score, and may even come with a promotional zero-interest period that lets you borrow money at no cost for a few months or more.
