Buy Now Pay Later in Canada: Is It a Scam?

Why wait to save up the money to buy something when you can get it right now and just pay for it later? That’s the message you may have gotten from all the apps that offer Buy Now Pay Later in Canada popping up over the last few years. These payment plan apps have been gaining popularity steadily since Covid became part of our vernacular, with big sites like Sephora, Apple, Wayfair and Sleepcountry adding them to their checkout carts.

With interest rates and inflation rising and another recession on the horizon, these apps are being promoted more than ever to young people and low-income families. Retailers want to keep consumers shopping and spending money. That’s why by pushing Buy Now Pay Later in Canada, they’re making it easier for you to spend money, regardless of if you can afford to or not.

Since Buy Now Pay Later apps have become more popular lately, I wanted to find out more about them and how they work. That’s why I’m sharing everything you need to know about these apps so you can make sure you don’t fall for this new, digital debt trap.

Who Are the Biggest Buy Now Pay Later in Canada Companies? 

• Paybright
• Klarna
• Afterpay
• Zip
• Affirm
• Sezzle

It’s important to know who the biggest players are in the industry because each of these companies has different terms and conditions and operates slightly differently from one another. If you plan on using one of these apps, be sure to read the fine print, or else it could cost you.

How Does Buy Now Pay Later Work?

A Buy Now Pay Later payment plan is a short-term installment loan issued to you by one of the companies. As opposed to other loans, these payment plans typically come with zero interest. The loan is usually structured as 4 bi-weekly payments over the course of 6 weeks. However, they can offer longer time periods to pay back for bigger purchases, though usually, they charge interest for extending the payment timeline. A typical example of a Buy Now Pay Later plan could look like you spending $240 and having to pay $60 every two weeks until the full balance has been paid off.

How Do Buy Now Pay Later Apps in Canada Make Money?

These installment loans are typically interest-free, so it begs the question, how do these companies make money? The biggest way Buy Now Pay Later apps make money is through the merchants that partner with them. For example, if Sephora offers Afterpay as a payment option for their customers to use, they have to pay Afterpay between 4-6% of each purchase made. 

For reference, Sephora only has to pay between 1.4%-2% on each purchase when accepting credit card payments, and when they accept debit transactions they pay a flat fee of 10-40 cents for each purchase.

In comparison to other forms of payment, that percentage is a pretty steep fee to pay. So why would retailers agree to this partnership? A big reason is that Buy Now Pay Later apps help convert more people into paying customers with a typical conversion of between 20-30%. Furthermore, these apps help encourage customers to spend more than they usually would, sometimes as much as 30-50% more.

However, what you’ll likely see over time is these merchants trying to pass on the cost of these fees to consumers in the form of higher prices for their merchandise. Or, they may be allowed in the future to pass on these costs directly to consumers as an additional fee. This scenario is similar to how merchants in Canada (except for Quebec) are now allowed to pass on credit card interchange fees to consumers when they checkout.

With that said, Buy Now Pay Later companies also make money directly from consumers. Even though most of them promote the fact that they don’t charge any interest, most of them do still charge other fees.

Do Buy Now Pay Apps Charge Fees?

In Canada, currently, Paybright, Afterpay, and Zip don’t charge any fees for making a late payment, but they do in the U.S. Personally, I don’t think charging zero late fees in Canada will last forever and is simply a marketing tool to encourage more Canadians to use them. I wouldn’t be surprised if we saw late fees being introduced by these companies in the coming years.

As for other BNPL apps, Klarna doesn’t charge late fees but if you don’t pay off your balance, they will send it to collections.

Affirm doesn’t charge late fees, but they do charge interest if you make a larger purchase.

Sezzle seems to be the worst company in terms of fees. They charge convenience fees if you use a debit card, credit card, or prepaid card instead of connecting your bank to your Sezzle account. They’ll also charge you a fee for rescheduling your payment (though you do get one rescheduled for free), and a fee if you fail to pay one of your installment payments. 

Furthermore, with all of these companies, if you miss a payment, they’ll freeze your account so you can’t make any new purchases until your debt has been paid off.

Will Using a Buy Now Pay Later App Hurt My Credit Score?

Whenever you sign up for one of these apps, they will perform a soft credit check. This means they’ll look at your credit profile to verify your identity and assess your riskiness before approving you to use them. The good news is a soft credit check does not negatively impact your credit score, only a hard check does. However, many of these apps offer services that allow you to pay back what you borrowed over a longer period of time (for example, over 6 months), and these services do perform a hard credit check and thus could negatively impact your credit score.

Why I Think Buy Now Pay Later in Canada Is a Bad Idea

Besides fees, there are other aspects of using these apps that don’t sit well with me and can make your life harder if you choose to use them.

Getting a Refund Is More Complicated

If you were to pay for your item directly with the merchant using debit or credit, making a return and getting a refund is fairly straightforward. You return the item and they refund the purchase price back onto your original form of payment.

But if you used a Buy Now Pay Later app to make your purchase, it can be a real headache. For instance, it could look like you returning the item through the merchant, and then the merchant provides you with store credit or a gift card in exchange for your return. However, you would still be on the hook to pay off your balance with the Buy Now Pay Later app. 

Alternatively, you would return your item, but the merchant won’t issue you a refund, the Buy Now Pay Later app will. Remember, it’s technically the Buy Now Pay Later app that made the purchase (buy now), and you are paying them back (pay later). That means the merchant would issue the refund to the BNPL company, and only once they’ve received that refund, will they pass that refund onto you. Sometimes it can take up to 28 days for a refund to process, which means you’ll still be required to make all of your installment payments to the BNPL in the meantime.

Buyer Protections 

Another big drawback with these apps is there are almost no buyer protections when compared to credit cards. For example, if there’s a weird charge on your credit card, you would simply contact your card issuer to dispute it, and while it’s being investigated you won’t have to pay for it.

Conversely, Buy Now Pay Later lenders generally require you to contact the merchant directly, which can be difficult and time-consuming. Moreover, you’d still be required to make all your installment payments, even if the purchase in question is in dispute.

Credit cards can also offer purchase protection to insure your purchase against theft, damage, or loss, in which case you’d get a replacement, refund, or repair. Most credit cards also offer extended warranties for purchases. However, Buy Now Pay Later apps don’t offer any of these benefits. Even if you pay off your BNPL loan using your credit card. You have to make the purchase directly onto your credit card to get these benefits.

Bad for the Consumer

But honestly, those aren’t even the big reasons why I don’t love Buy Now Pay Later in Canada. My biggest gripe is that they are offering a band-aid solution to a bigger problem, similar to payday loans. They may help you initially when you have no other option, but they can be predatory in nature.

Contrary to their marketing, these BNLP companies’ sole purpose is to make a profit, not to help you with your finances.

Although the best way to use a Buy Now Pay Later app is to pay off your loan using a debit card or connecting your bank account, according to a Citizens Advice survey, more than 42% of customers borrow money to make their payments. And if they borrow using a credit card, and but don’t have the funds to pay off their credit card, they could be paying between 19-25% APR.

Even if they did use a debit card or link their bank account, when the payment is due and there’s nothing in their bank account, the Buy Now Pay Later app will still try to retrieve those funds. This could lead to being charged a non-sufficient funds fee or overdraft fee.

Another unsettling thing about these apps is that their marketing targets young people with limited financial literacy using popular Tiktok and Instagram influencers. They use these influencers to promote their apps and encourage Gen Zs to YOLO their money away, despite the fact that doing so could lead to some serious financial consequences.

Final Thoughts

I know that there are some benefits to using these plans but to me, the cons outweigh the pros. I understand that they could be helpful in some circumstances, such as a financial emergency or having low credit. However, even in those instances, I would encourage better personal finance practices. These would include saving up an emergency fund, using a budget, and building up better credit over time.

As a financial counsellor, I’ve always reminded my clients that in order for them to improve their overall financial well-being and alleviate stress for the long term, they must live within their means, make a plan for their money, and set clear goals. I’d encourage you to do the same.

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