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Does Buy Now, Pay Later affect credit?

To the point

Buy Now, Pay Later is a new option to pay for goods in Canada. But how does it work and will it affect your credit score ?

The COVID-19 pandemic has significantly affected our lives, it was –still is– the reason why so many of us changed our behavior and habits towards shopping.

In fact, online shopping opened doors for us while many were closing due to the tightened measures and temporary shop closures.

This year, over 27 million eCommerce users in Canada are accounting for more than 72% of the population, a statistic that is expected to surpass three quarters in 2025. The end justifies the means, and the increase of online shopping has introduced new flexible payment options such as installments payments, allowing consumers to make larger purchases without having the obligation to paying all at once, or what is currently known as Buy Now, Pay Later!

Buy Now, Pay Later (BNPL): How does it work?

While installment payment options seem to have popped up recently, it is surprising to know that Buy Now, Pay Later services have actually been available for quite some time.

The process of BNPL programs is essentially a short-term financing plan for purchases. Whether you shop online or in-store, you will be asked to make an initial down payment for the item, with the option of spreading the payments over time for the remaining balance.

Most of the time, payments are split into four installments, keeping in mind that this number may differ depending on the BNPL service and the actual size of the purchase. In terms of cost, many point-of-sale installment loans are interest-free, making them more attractive than a credit card with a high annual percentage rate (APR).

It is especially oriented toward limited disposable income individuals, allowing easy access to larger purchases.

Who Offers BNPL Plans?

There are several BNPL options in Canada, and the movement has developed with programs offered by companies like Afterpay, Sezzle, and PayBright.

Australian Fintech company AfterPay has scaled up overseas, to cover several countries including Canada and the United States. In order to use AfterPay, you will need to connect your credit or debit card to their app. Once a purchase is made, you will pay the first of the four installments, having six interest-free weeks to pay the remaining three. Don’t worry, AfterPay will remind you each time in case you don’t check your payment schedule in the app.

Like Afterpay, Sezzle offers a four-part installment plan over six weeks without interest. With a catalog of more than 34,000 partner retailers, chances are you will find it handy if you want to buy now and pay later. However, it will do a soft credit check and take into account your purchase history with Sezzle in order to qualify for the option. Though the size of the first payment may vary, it is usually 25% of the price tag.

Interesting fact: PayBright was the first Canadian fintech company to launch BNPL back in 2017. It offers two plans: “Pay in 4” or “Pay Monthly”. If you want four installments, PayBright will not run a credit check and won’t charge any interest for biweekly payments. You will be subject to a credit check if you pick the Pay Monthly plan, because it is essentially a loan, with significantly less interest than what you would pay with a credit card.

What is the real cost of using BNPL Services? Will affect your Credit Score?

In a perfect world, BNPL is a great idea! It is a wonderful way for small businesses to earn more while also allowing individuals to make purchases they can tailor into their budget.

Prudently repaying your BNPL purchase will improve your credit score, and missed payments can negatively affect your credit score. Missed deadlines and payments usually stay on your credit report, informing potential lenders that you are a higher-risk borrower. It depends also on the third-party financial service the business you are buying from partners with.

For instance, Afterpay doesn’t run credit checks or report activities, while PayBright do. You might need to read the fine print and understand the costs if you do choose to use a Buy Now, Pay Later plan.

Overall Pros and Cons of BNPL

Making financial decisions can be overwhelming, especially during your first transactions when you’re just starting to make your own money!

You need to keep in mind that Buy Now, Pay Later option is a grey area, which could lead to over-borrowing and spending beyond necessary means. As much as it can be helpful, the risks are a bit high if not used carefully.

The goal is to allow you to spread the payment out over time if you’re not able to afford it in one single payment, to better fit in your scheduled budget. Close to 0% interest rates (sometimes even 0%) for the people who honor their payments on time make the BNPL plan even more tempting.

Nevertheless, the item acquired may cost even more than its price if the BNPL plan chosen requires a fee to access it, and missed or delayed payments can quickly turn into an expensive payment method that can downgrade your credit score.

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