Buy now, pain later? How to use buy now, pay later plans wisely

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1Q: I’m concerned about my brother and his wife. They were married last year and have recently purchased a high-end townhouse. Currently, they are making numerous purchases to furnish their new home and appear to be relying on buy now, pay later plans. In the past, I helped my brother when he experienced financial difficulties due to payday loans. While I was happy to help him then, I now have my own financial commitments that would make it difficult to bail him out this time. I believe there may be an underlying issue with spending habits between my brother and his wife, which these payment plans seem to encourage. Although I recognize that it is not my place to dictate how they manage their money, is there any information I could provide to help them understand the challenges they could encounter by stacking up an endless series of these small buy now, pay later loans? ~Neal

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A: Observing loved ones embark on an exciting new journey can be challenging when their financial choices seem to be high risk. If open communication is possible, it may be beneficial for you to share your perspectives with him while asking him questions to understand his motivations better. While it is not feasible to control another person’s spending, providing insight and practical guidance could support them in making more informed financial decisions.

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Buy now, pay later plans, which allow consumers to spread out payments and potentially avoid interest charges, have existed for decades. Previously known as deferred payment or retail financing plans, these arrangements were often accessed through store credit cards and commonly used for items such as furniture and appliances.

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Deferred payment plans typically required a credit application, and if approved, application fees and taxes on the purchase were paid immediately. To prevent paying interest charges or additional fees, the remaining balance was expected to be paid in full before the designated due date. The payment schedule could be determined by the borrower, which sometimes led to these plans being referred to as buy now pay never. Deferred payment plans are still available, as are many more types of BNPL programs.

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What are buy now, pay later plans?

Buy now, pay later plans allow shoppers to purchase items immediately with a partial payment, and pay for the balance over time through instalments, often interest free if payments are made on schedule. Picture a $1,200 couch split into four equal payments of $300, automatically deducted from a bank account or credit card every two weeks. It’s a convenient way to spread out costs and align them with when you receive your income. The catch, however, lies in the details.

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Each buy now, pay later service provider, such as Afterpay, Klarna, Sezzle, or PayBright, has its own terms. Generally, conditions specify that missed payments may result in additional fees, higher interest rates, and potential negative marks on a credit report. Since these terms are usually presented at checkout, shoppers may have limited time to review and compare their options.

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Approval for an equal payment plan at one retailer’s buy now, pay later company often results in a shopper being prequalified for similar terms at another retailer using the same program. As a result, merchants are even more motivated to cover the cost of the program they offer, with the expectation that offering customers interest-free payment options may increase sales.

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Credit card issuers may provide their own equal instalment programs for larger purchases made with their cards. However, it is essential to thoroughly review the terms and conditions. These plans are often converted into instalment loans that accrue interest and/or fees. While some borrowers may benefit from an introductory promotional rate, this rate can increase substantially if the loan is not fully repaid by its due date.

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Practical tips for using buy now, pay later plans wisely

With buy now, pay later plans, small loans with frequent payments can quickly accumulate into significant debt, especially alongside regular expenses. To use these options wisely, especially when shopping online, follow these tips to avoid common pitfalls.

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Read the fine print: Before clicking “accept” on the checkout screen, read the terms of the loan you are agreeing to. Review late fees and the interest rate, especially how it may change if a payment is missed. Verify if accepting the plan terms triggers a credit check and if your loan and payments will be reported to the credit bureaus.

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Ensure the loan fits your budget: Tally up your monthly expenses to ensure that payments don’t push your budget over the edge. One $200 monthly instalment payment might seem manageable but stacking up three or four might not be.

Minimize buy now, pay later usage: Outline a spending plan for everything you want to buy for a particular project, such as furnishing a new home. Once you know what you want to spend, work backward to fit it into your budget. Establish a separate savings account and siphon money from each paycheque into that account. When making a purchase for your project, use savings whenever possible. Limit buy now, pay later plans to no more than one or two at a time; track them carefully in your overall budget and pay off existing ones before adding more. (Hint: you may want to apply these same rules for using buy now, pay later plans when shopping casually.)

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Be strict with making payments: Make timely payments a non-negotiable, forgoing other discretionary spending, such as picking up takeout, or buying new jeans, to ensure you don’t fall behind. Late fees and interest can add up quickly, and in Canada, some buy now, pay later activity is beginning to show up on credit reports. Automating payments or setting calendar reminders can help you stay on track.

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Know your options: A buy now, pay later plan isn’t always your best option. Saving up for a purchase eliminates debt entirely and forces you to think carefully about whether your selection is a need or want. In addition, a credit card with rewards, cash back, or a low interest rate might offer more flexibility. For bigger items, a personal loan could provide predictable payments without the temptation to reuse the funds or overspend.

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Check in with loved ones: A casual conversation about buy now, pay later risks with friends or family can help raise awareness. If someone shares objective facts with you, such as “stacking too many plans can hurt your credit,” or if they pass along an online article about these plans to you, resist feeling judged and consider your spending habits in light of their care and concern.

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The bottom line on using buy now, pay later plans

BNPL plans can serve as a valuable tool for managing big expenses, but they’re not a free pass to spend without limits. By understanding the terms of your loan agreements, protecting your privacy, keeping payments manageable, and resisting the urge to overcommit, you can achieve your goals without derailing your dreams. Remember to also request your own credit reports for free at least once a year to verify that BNPL plans are reported accurately, especially once balances are fully repaid. A little knowledge and discipline today can transform your plans from a potential trap into a stepping stone toward a stable, stress-free financial future.

Related reading:

From the FCAC: Buy Now Pay Later Plans Explained in Detail

Helping Family Financially, How to Tell When It’s Gone Too Far

Summer is a Good Time for a Financial Check-In (With Yourself!)

Peta Wales is President and CEO of the Credit Counselling Society, a non-profit organization. For more information about managing your money or debt, contact Peta by emailcheck nomoredebts.org or call 1-888-527-8999.

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