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  • Writer's pictureHilary M.K. Poff | CFA

Why “Buy Now Pay Later” Is a Risky Idea for Consumers

Soaring inflation and rising interest rates means its costs more to buy things and it costs more to borrow money. Canadians are responding to price increases by spending less. In fact, 80% of Canadians say they have cut their spending in recent months to stretch their savings. But that doesn’t mean they aren’t still spending.

To make their dollar last longer and spread out their bill payments, a growing number of Canadians are opting for “buy now, pay later” (BNPL) plans. BNPL options have grown significantly since the pandemic, but consumers should understand the risks before making it part of their daily budget.

What Are the Risks of Buy Now Pay Later?

BNPL is essentially a point-of-sale loan where a customer can purchase an item and then pay for it through regular installments over a set period of time. Because these services don’t charge interest, they fall out of the purview of financial regulators.

And that’s a big part of the appeal of BNPL. A recent study found that consumers between the ages of 18 and 34 were most likely to use online BNPL services the most.

The biggest reason why consumers use BNPL services is because they cannot afford to pay for an item or service upfront, and to avoid interest and fees. BNPL make purchases people could otherwise not afford, more “palatable.”

It all adds up, though, and can lead to overspending because purchases appear cheaper than they really are. A survey from Swedish fintech company Klarna found that consumer spend 45% more when they use BNPL.

On top of that, BNPL can make shoppers think low weekly or monthly installment costs are reasonable. But when you purchase a large number of items, you end up with a whole lot of BNPL payments.

What about the benefits of avoiding interest and fees? Business may not charge interest with a BNPL option when you make a payment on time, but they will if you’re late. That too is part of the problem with BNPL; most shoppers don’t pay attention to the interest rates and fees associated with missing a payment because they never plan on missing one.

But multiple purchases on different schedules with numerous companies can make it difficult to keep track of payment schedules and make it easy to miss a payment. Even if you miss a payment with PayPal or Affirm, which don’t charge fees, missing a payment can damage your credit score if they report the unpaid debt to credit bureaus. And this can negatively impact your ability to get another loan, get an apartment, car, etc. Credit Karma found that 72% of people who were late with a BNPL payment saw their credit scores fall.

In today’s macroeconomic environment, it appears as though more and more BNPL shoppers will get into trouble with missed payments. Half of all Canadians say they couldn’t manage an unexpected expense of more than $1,000. And $1,000 in BNPL charges isn’t difficult to rack up.

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