After years of financial strain, Canadians are now living in a time with record inflation, large tax hikes (which seem to come every few weeks), and the overall pending threat of a global recession. While everyone has a different financial situation these financial stressors will affect everyone in one way or another. From higher mortgage rates making it more difficult to purchase a house or renew an existing mortgage, to higher prices at the grocery store eating into our disposable income we all see increased bills each month. The bottom line is we should be aware of what our money situation is and how we spend our dollars.
As we enter the busy holiday season, we know that cash-strapped shoppers are looking for ways to spread their dollars, and retailers are looking for ways to make it easier for you to spend money with them. Recent studies have shown that up to 70% of Canadians will be shopping online, and online retailers have been busy working on ways to entice you to shop with them even when you can’t afford to.
The idea of Black Friday has gained traction in Canada over the past decade, and we are accustomed to seeing offers of big savings, and bottom-of-the-barrel sale prices. What may be new this year is the option to buy now and pay later. This goes beyond paying with a credit card, and paying off a credit card balance once the bill comes in. This new notion is that the shopper will have the option to pay off the purchase price in smaller payments over time.
How does buy now, pay later work?
Many online sites are using this as an option to allow purchases to be broken up into smaller, more affordable payments. Klarna, a large buy now, pay later (BNPL) service launched “Pay in 4” that allows you to split purchases into four equal payments each without interest.
Meanwhile, there are several entrants to the Canadian market; and companies such as Affirm and Afterpay have recently partnered with Amazon and Square to make further buy now, pay later options available. While they may boast that they are interest-free, be aware that it doesn’t mean fee free, depending on the service provider, and the option that you go with- there may be fees associated.
We live in a time of immediate gratification, so the suggestion of getting your purchase right now and leaving the big payments for “another day” is an exceedingly tempting idea. For many shoppers- this can be a great payment option.
Before you hit click, there are a few things you need to be aware of.
- This payment option is seen as short-term financing, or as a point-of-sale instalment loan.
- This can easily be a spending trap for unaware shoppers.
- This can open up new payment options, making larger payments more manageable. Be aware that this doesn’t mean you have more money to spend so keep an eye on your overall budget! Some shoppers will go back to add more items to the shopping cart which is exactly what the retailer is hoping for.
- By stretching your finances beyond your means, you may end up starting the next month in debt with your paycheque already reduced in value as you must pay for the purchase. Keep a list with your total amount spent, and each time a payment is made. It will keep you on track for how much you still owe, and give you the ability to make an additional payment if you have the ability to do so.
So, how does a buy now, pay later instalment loan really work?
While each program and company will have its own terms of conditions there are a few things they all have in common. You click on the offer at check out, and the approval comes in instantly. They will typically take a down payment right away and you will then make the additional payments from your bank account, or credit card. The interest rates and fees will vary depending on the platform so if you decide to go this route it is important to read the fine print on the agreement. Currently, the major providers are interest and fee free as long as you are able to pay on time. It is important to know that this can change, and new providers coming into the market could decide to charge fees.
Another thing to keep in mind is how this could affect your credit score. The initial credit check tends to be a soft check, which doesn’t affect your credit or show up on your credit report. However, some vendors have a monthly payment subscription offer which does have a hard credit check and will show up on your report. The only way to know if this will show up on your credit report, is knowing if you are agreeing to a soft credit check or a hard credit check before you agree as this might vary from each buy now, pay later provider. One time you will not be able to avoid a hit against your credit score is if you make a late payment or miss it altogether.
Can buy now, pay later be a good option?
Buy now, pay later is not all together a bad choice, in some cases it could even help build your credit. Some of these platforms report to the credit bureaus, so look for options to opt-in for credit bureau reporting. By doing this you accept that your payments, good or bad, will show up on your credit report. This option gives you the ability to break down large purchases in easy to afford payments. This can be helpful to shoppers who properly plan and budget for those payments. It can save you money if you purchase through buy now, pay later instead of having the purchase sitting on a credit card gathering interest. We all know that emergencies come up and often with unexpected bills. Buy now, pay later might give you some more flexibility with unexpected spending.
If you are grappling with your finances, there are free online budget planners offered by many reputable financial institutes and debt relief providers like at Bromwich+Smith. If you are struggling financially or with debt this holiday season or any other time, only a professional Licensed Insolvency Trustee (like Bromwich+Smith) can provide debt relief to help rebuild your worth.
