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Buy Now, Pay Later

"Buy Now, Pay Later" (BNPL) is a payment option that allows you to buy a product now and pay for it over time. Usually, this method breaks down a big payment into smaller payments, called instalments. 

How BNPL plans work

A BNPL payment method is a credit agreement between you (the buyer), the retailer, and a financial service provider. The financial service provider pays the retailer for the item in full, and you pay the financial service provider using a payment plan.  Sometimes, these financial service providers charge interest and/or fees.

There are two common payment plans associated with BNPL payment methods:

Equal payment plan

With an equal payment plan, you make payments in instalments. The minimum amount you must pay and how often you must make payments is outlined in the terms of your agreement. Typically, payments are usually made bi-weekly or monthly until the item plus any interest and fees are paid for in full.

Deferred payment plan

On a deferred payment plan you must pay the full amount owed by a specific due date but there is no set schedule to make the payments. If you pay for the item in full by the due date, you typically will not incur extra charges. 

Making BNPL payments

Some financial service providers accept different payment plans, while others only accept one plan. Here are the common payment models for financing BNPL plans:

Pre-authorized debits (PAD)

In a PAD payment plan, you provide your banking details to the financial service provider and your scheduled payments are automatically taken out of your bank account.  If there isn't enough money in your account to cover a scheduled payment, you may be charged a fee.

Pre-authorized credit card payment

In a pre-authorized credit card payment plan, you provide your credit card details to the financial service provider. The set payment amount is automatically charged to your credit card at regular intervals (typically bi-weekly or monthly), depending on the terms of your agreement. Some providers may add processing fees or interest charges to each payment. 

BNPL payments will appear on your credit card statement. It's your responsibility to ensure that you make payments on your credit card balance on time to cover the cost of the BNPL payment. 

Not all credit card providers allow BNPL transactions. Some may block transactions or have specific rules about them. It's a good idea to check with your credit card company to understand their policies about BNPL. Some credit card companies allow you to break large purchases down into instalments without signing up for a BNPL payment plan. You can check with your provider to see if this is an option. 

Retail credit card

A retail credit card is issued by a specific retailer or store. These cards are designed to be used only at that retailer or at specific stores associated with their brand. Many retailers partner with financial service providers to offer this service to their customers. 

The payments are automatically charged to your retail credit card in regular instalments, which are stated in the BNPL agreement. These payments may be part of your minimum monthly payment or included as a separate transaction.

There may be interest charges or fees associated with these payments. Some BNPL programs offer zero per cent interest for promotional periods. Be careful, if the item is not paid for in full by the date set in the BNPL agreement or if a payment is missed, all promotions may be canceled. 

Personal loan

A retailer may offer you a personal loan to cover your BNPL expenses. If approved, you can use the loan funds to make the purchase. A personal loan comes with an interest rate and specific repayment terms. 

Things to consider before signing up for a BNPL plan

Before you decide to use "buy now, pay later," find out how much it may cost you. Extra charges and fees can turn a “good deal” into an expensive one. Consider: 

Interest and Fees: Some BNPL plans may charge interest and late fees if you do not pay your instalment on time.

Repayment Terms: Familiarize yourself with the repayment schedule. Can you afford the payments?

Purchase Necessity: Evaluate if the purchase is essential or if it can wait until you have the funds. Make sure using BNPL aligns with your budgeting goals.

Multiple Plans: Are you signing up for more than one BNPL payment option? If you have several BNPL plans, it might become difficult to manage multiple payments.

Credit Checks: Will the retailer or financial service provider carry out any credit checks? How will this impact your credit score?

Terms and Conditions: Always read the contract carefully. Some BNPL agreements may have conditions that do not fit your financial situation.

Returns and Refunds: Understand the return policy – if you need to return the item, how does it affect your BNPL plan?

Alternatives: Consider other payment methods or financing options that might be more suitable for your financial situation.

The BNPL agreement

If you choose a BNPL option, you will sign an agreement with the financial service provider. In the agreement you should expect to see information like:

  • Description of the product
  • Purchase amount
  • Payment amount and frequency of payment 
  • The term of the agreement: How long the agreement lasts, or how long you have to pay the full amount.   
  • Prepayment limitations: Can you prepay a portion or in full at any time without charges or penalty?
  • Fees and charges applicable. If you opt for additional or optional services, the agreement should include the additional cost and how to cancel the services if you change your mind. 
  • What happens in the case of a missed payment.

If interest is charged on the payment plan, you can also expect to see:

  • Interest rate 
  • How interest is calculated, including the date when interest starts to accrue and if there is a grace period. A grace period is a period of time when your provider doesn’t charge interest. For example, credit card companies usually give you an interest-free grace period between the date your statement is delivered and the payment due date. 
  • Total cost you will pay, including interest and other charges or fees
  • Annual Percentage Rate (APR): The interest rate calculated yearly.

Just like with payday loans, the ease of using "buy now, pay later" may end up costing you. Before diving in, review your financial situation and budget, be aware of all costs, and carefully read through the agreement.