Buy now, pay later: Are installment plans a budget win or finance fail?
What is buy now, pay later?
The troves of social media memes echoing the sentiment don’t lie: According to Statistics Canada, e-commerce sales hit a record $3.9 billion in May 2020—a 110.8% increase from May 2019. And it looks like our mall-free shopping habits will continue: 44% of Canadians say COVID-19 has shifted their payment preferences to digital and contactless shopping for the long term. These buy now, pay later programs were timed nicely, no?
While installment payment options have seemingly popped up overnight, you may be surprised to learn that buy now, pay later services (BNPL) have been available for a while.
PayBright, a Toronto-based service that launched in Canada in 2017 and has partnered with over 7,000 merchants, from Wayfair and Endy to Sephora and Hudson’s Bay, was recently bought out by Affirm, an American BNPL, for a cool $340 million. The U.S. company Sezzle also launched on this side of the border in mid-2019 and has over 1,000 retail partners, including brands with online shops, like Matt & Nat, Knix and Frank and Oak. Afterpay, the one with the most self-explanatory name, launched in Canada in August 2020, after success in Australia, New Zealand, the U.S. and the United Kingdom. Even major airline Air Canada recently bought in, partnering with Uplift to allow customers to spread the cost of their air travel over several fixed monthly payments (making that trip to Hawaii seem a lot more affordable). As retailers continue to partner with BNPL programs—like Apple’s partnership with PayBright—other financial companies, like banks, are entering the game.
Take for instance CIBC, which launched the Pace It feature on its credit cards in 2019. Pace It allows cardholders to stagger payments on purchases of more than $100 across periods of 6, 12 or 24 months at lower interest rates than the bank normally charges on unpaid balances on the rest of their card. (Using Pace It costs 5.99%, 6.99% and 7.99% for each period, respectively.) Cardholders who qualify for the program simply use their banking app to select the purchase they’d like to pay for later in their banking app, and their available credit balance is unaffected. Scotiabank is getting in on the action too, with their SelectPay program, which works similarly to Pace It, but charges a monthly fee in lieu of interest. MBNA, American Express and Triangle credit cards all offer similar features on their cards now, too. Major credit card companies are buying into the payment trend, too. Payment heavyweight Mastercard has introduced a buy now pay later program, allowing users to pay for purchases in interest-free installments on their debit, credit and prepaid cards. Visa launched a similar program, Visa Installments, too.
The concept may not seem that different from the layaway programs of yore, offered in department stores or payment plans offered on big-ticket items like auto and furniture. (Layaway was a retail finance tool brought in during the Great Depression, but it swiftly stopped in the ’80s and ’90s when credit cards became more mass.) The main difference between layaway and BNPL? You can use BNPL services on purchases under $100, can you use them online and they’re becoming increasingly ubiquitous. And it looks like the programs are here to stay: the trajectory of buy now pay later programs in Canada remains strong. In fact, a recent report anticipates that BNPL will grow 55% annually in Canada, with its value increasing from US$2.5 billion in 2020 to upwards of US$17.6 billion by 2028.
So, is it wise to buy that full-price parka now and pay for it later? Here’s what you need to know before you buy into the installment plan trend.
How buy now, pay later plans work
Think of it as “layaway in reverse.” Rather than making payments over time and eventually gaining possession of the item, you get it now and continue making payments afterward. Generally, once you sign up with a third-party BNPL, you make your first payment, your item ships, and you make the rest of the payments as per the agreed-upon schedule.
Which service you can choose depends on where you’re shopping, since the BNPL partners with the merchant directly. But make sure to read the fine print, as each company’s terms differ slightly. Afterpay, for instance, has no interest and no late fees, but caps the amount you can spend at first, gradually upping your limit as you prove yourself reliable. Other services charge interest (usually at a low rate) and some charge fees for late payment.