How does the BNPL model work?

Instead of paying for a purchase all at once, a BNPL plan lets you make payments in instalments—usually four—over the course of a few weeks or months. The BNPL company may charge you fees or interest for the privilege, so it’s best to read up on the plan you want to use.Instead of paying for a purchase all at once, a BNPL plan lets you make payments in instalments—usually four—over the course of a few weeks or months. The BNPL company may charge you fees or interest for the privilege, so it’s best to read up on the plan you want to use.

How does Afterpay make money?

Afterpay makes money from the fees it charges merchants, which range from four to six percent. This cost is not passed onto the consumer; however, charges may apply for late payments.

Does Buy Now, Pay Later affect credit score?

Unless you opt into a specific program that reports to credit bureaus, such as Sezzle Up, or you choose a payment plan that operates like a loan, such as PayBright’s Pay Monthly plan, there will be no impact to your credit score. Most BNPL companies either conduct soft credit checks, or no credit checks at all, which means your credit scores remains unaffected—unless you miss payments, of course.

By Karen Stevens & Leah Zitter

🗓️

Updated: October 13, 2022

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Buy Now, Pay Later

Buy Now, Pay Later: The new installment plan trend

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By Karen Stevens & Leah Zitter

🗓️

Updated: October 13, 2022

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Sometimes you need to make a major purchase, but you don't have all of the cash upfront. That's where Buy Now Pay Later comes in. Depending on the Buy Now Pay Later website/app or plan you choose, you can split your purchase up into multiple payments with no additional interest charges or extra costs (as long as you pay on time).

What happens when you need a new laptop, but don’t yet have all the cash to buy one outright? You could use one of the traditional methods of borrowing, such as a credit card or a line of credit for your purchase, or you could try Buy Now, Pay Later (BNPL).

BNPL is a spin on the layaway plan. Instead of paying the total off bit by bit until you can collect your purchase, the program allows you to take the item home first and then make the payment.

And it works — as long as you use this option for major, one-time purchases and make timely payments. Otherwise, you’ll find out soon enough why critics dub Buy Now, Pay Later as “Buy Now Pain Later.”

How does Buy Now, Pay Later work?

Most BNPL programs have an online catalogue of participating stores where you choose your product, choose how you want to pay (manual or automatic repayments; by credit or debit), and commit to the program’s time frames for repayments. Some programs will run a soft credit check on you before setting you up with your instalment plan.

You might also come across an option to use BNPL while you’re online shopping. Usually, you’ll see the BNPL company’s logo at checkout, where you select it as your payment option. You might see something like “Pay with 4 interest-free payments of $49.99 using Sezzle,” depending on the BNPL company associated with the site.

Once you make your purchase and commit to a payment plan, you’ll get a reminder close to the repayment date. If you pay on time, you won’t be charged any additional interest. However, you may be billed for late/delayed payments, to which most companies add a fee/interest charge.

Types of Buy Now, Pay Later plans

You have your choice of several almost identical plans, all vying for your attention in a tightly competitive marketplace. Some companies, such as Sezzle, may choose to perform a soft credit check, while other companies, such as Afterpay, will never check your credit.

Each program charges different interest rates, and most will offer variations on a six-week, four-instalment plan. Although some companies, such as PayBright, provide options that function more like a short-term loan.

Late payment fees and penalties for missed payments vary. Some programs charge administration fees to set up the plan and processing fees when you make a payment, so make sure you read the fine print carefully.

Leading Buy Now, Pay Later websites in Canada

Canada has lots of options when it comes to BNPL. Check out the top five below:

Afterpay

Australian Fintech company, Afterpay, has expanded to operate internationally, including in Canada and the U.S. To use AfterPay, you’ll first have to download the app and connect your credit or debit card. When you make a purchase, you’ll make the first of four instalments. Then you have six interest-free weeks to pay the remaining three. Afterpay will send you reminders for your payments, although you can also check your payment schedule in the Afterpay app.

If you miss a payment, your account will be paused so that you can’t make any more purchases. Once you miss a payment, you will be charged a late fee, although that fee will never exceed 25% of the initial value of the purchase.

Sezzle

Like Afterpay, Sezzle offers a four-part instalment plan over six weeks without charging any interest. The American company’s catalogue includes more than 34,000 stores, so chances are you’ll find it useful if you want to BNPL.

Before you make a purchase, you’ll have to qualify: the company will do a soft credit check and take into account your purchase history with Sezzle. The size of your first payment may vary, but it’s usually around 25% of the total purchase price.

Fees come into play if your payment fails or you need to change your payment dates two times or more per order. On the plus side, Sezzle can help you build your credit if you sign up for Sezzle Up, which allows the company to report your payment history to credit bureaus.

PayBright

PayBright was the first Canadian fintech company to launch BNPL back in 2017 (Affirm has since acquired it). It offers two options: “Pay in 4” and “Pay Monthly.” If you choose the former, you won’t have a credit check and won’t be charged any interest — as long as you make your biweekly payments. If you choose Pay Monthly or use a PayBright Virtual Card for your purchase, you will be subject to a credit check.

Pay Monthly is essentially a loan. While the interest could be significantly less than what you would pay with a credit card, you may also be charged up to $29.95% on your purchases, so consider it carefully before moving forward.

If you miss a payment, there are no late fees. Instead, PayBright disqualifies you from making future purchases with their program.

Klarna

Hailing from Sweden, Klarna has a BNPL app in Canada and provides other online financial services internationally. In Canada, the app offers a typical BNPL four-instalment payment plan. With Klarna, the payments are automatically applied to your provided credit/debit card every two weeks. While you can pay off the entire balance early or in one go, you won’t be able to change the timing of your four payments.

Klarna doesn’t charge any interest on your purchases, and you won’t be charged a late fee if you miss a payment. However, if you don’t pay up, you risk being barred from using this app in the future.

Affirm

This San Francisco-based company is popular in the U.S., where it’s partnered with Shopify. In Canada, you might not see its name come up as much, but the offering is still competitive. With Affirm, you have your choice of payment schedules, which can range from three months to a year. Interest charges can range from 0% to 30%, depending on the purchase and your eligibility, and you may have to provide a down payment.

You’ll also have to pre-qualify with a soft credit check before you get a loan. Depending on the option you use, failure to repay your loan can negatively impact your credit score, so be careful. That being said, Affirm is upfront about its fees and terms, so there shouldn’t be any unpleasant surprises.

Alternatives to BNPL plans

Buy Now, Pay Later programs are appealing, but they may not be right for everyone. Some shoppers prefer the following alternatives:

Balance Transfer Credit Cards: Credit cards are a classic method of borrowing. You buy on credit and pay up when your bill is due each month. If you are unable to pay off your high-interest card each month, you may be able to transfer your balance over to a lower-interest option.
Personal Loans: Personal loans can offer attractive interest rates, especially if you have good credit. However, they’re usually more useful for large purchases, such as a new fridge, versus a relatively smaller online shopping purchase.

BNPL FAQs

How does the BNPL model work?

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Instead of paying for a purchase all at once, a BNPL plan lets you make payments in instalments—usually four—over the course of a few weeks or months. The BNPL company may charge you fees or interest for the privilege, so it’s best to read up on the plan you want to use.Instead of paying for a purchase all at once, a BNPL plan lets you make payments in instalments—usually four—over the course of a few weeks or months. The BNPL company may charge you fees or interest for the privilege, so it’s best to read up on the plan you want to use.
How does Afterpay make money?

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Afterpay makes money from the fees it charges merchants, which range from four to six percent. This cost is not passed onto the consumer; however, charges may apply for late payments.
Does Buy Now, Pay Later affect credit score?

+

Unless you opt into a specific program that reports to credit bureaus, such as Sezzle Up, or you choose a payment plan that operates like a loan, such as PayBright’s Pay Monthly plan, there will be no impact to your credit score. Most BNPL companies either conduct soft credit checks, or no credit checks at all, which means your credit scores remains unaffected—unless you miss payments, of course.

The bottom line: should you use a BNPL plan?

Buy Now, Pay Later is an attractive system. It gets you that expensive laptop you desperately want when you don’t have the money to pay for it. Your debt is interest-free, and there’s no impact on your credit score. Seems too good to be true. And it’s great — but only if you have the money when the bill is due.

Even though issuers say (in very, very fine print) that they take into account financial difficulties, you shouldn’t count on that if you find yourself in a financial jam. Before you use Buy Now, Pay Later, make sure that you will have the funds at a future date to avoid fees, getting barred from using a particular program, or a potentially negative impact on your credit score, depending on which plan you chose.

About our authors: faces of finance

Karen Stevens, Author

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