As the cost-of-living continues to rise, many consumers are looking for alternative ways to take the pressure off of spending substantial amounts of money.

One option growing in popularity are Buy Now, Pay Later (BNPL) programs. These financing programs allow consumers to purchase items they want immediately while also offering them extra time to pay for the desired item(s), typically in interest-free installments. For those without the means to incur the full cost of a large purchase all at once, BNPL programs might seem like a financially appealing offer.

Before jumping headfirst into a BNPL program, remember to do your homework. Here are a few considerations to keep in mind to help you decide whether a BNPL plan is right for you:

Read the fine print

As desirable as this option may appear, it’s in your best interest to read the fine print carefully before committing to a BNPL program. Not all BNPL programs are the same, and each company will have their own unique set of terms and conditions in place that you need to be mindful of before signing on the dotted line.

Two types of plans

There are two types of Buy Now, Pay Later plans: The equal payment plan and the deferred plan. If you sign up for the equal payment option, you will be making regular payments over a scheduled and allotted time. This will continue until the outstanding balance has been fully paid. With a deferred plan, you are responsible for paying the money owed by the deadline but there are no fixed amounts for how much you are required to pay in intervals.

Down payment required

Don’t let the name fool you, BNPL typically requires a small upfront down payment before you can enter into the agreement. Usually, a 25% down payment is required to initiate the transaction.

Missing a payment will be costly & affect your credit score

Most Buy Now, Pay Later plans charge 0% interest as long as the terms and conditions of the plan are being met. If you enter into a BNPL agreement, be sure to stick to the agreed-upon repayment schedule and make your payments in full and on time. Arrangements can also be made for payments to be deducted automatically from your debit or credit card – just make sure there are enough funds in your account before each installment’s due date. Missing a payment – or not having the appropriate funds in your account when a payment is due -will negatively affect your credit score and will result in interest charges and/or fees that can be steep and make a serious dent in your wallet.

Risk of spending beyond your means

BNPL payment options run the risk of making it a little too easy for Canadians to purchase items that they may otherwise forgo if the full cost was required upfront. When a large purchase is split into smaller payments, it makes items seem “more affordable” than they actually are – which can put you at greater risk of making impulse purchases and overspending. If you’re choosing the BNPL option to purchase multiple items around the same time, think again as this could spell trouble for your finances if these extra costs don’t fit within your existing budget once the installment payments kick in.

Is BNPL the best option?

BNPL is not the only way to purchase a new item. Caval Olsen-LePage of Affinity Wealth Management advises that it is always better to have the money saved ahead of time, especially for purchases that are considered “wants” versus “needs.” However, sometimes that isn’t feasible. Here are a few other options to help guide you towards the right decision:

• Is this a larger purchase like a vehicle or a home? Talk to your financial institution about a loan with payment options that fit within your budget.
• How soon do you need to make this purchase? Could you create a savings plan and delay the purchase until you have enough saved?
• If using a credit card – what is your strategy to pay it off as quickly as possible? Without a clear financial plan, you are more likely to take longer to pay it off and rack up greater interest charges.

Final considerations

Before you commit to a Buy Now, Pay Later plan, it’s always important to consider if you truly need the item(s) you are about to purchase. Discipline is key, as this will be required to pay off the balance owed for your purchase.

Be mindful that BNPL programs can also become increasingly expensive if you miss your payments, leading to incurred fees. Shop mindfully so as not to over-borrow and break your budget.

Jessica Kelly, Assistant Branch Manager at Bayview Credit Union recommends using your best judgment and double-checking the fees when choosing a BNPL program. “Set yourself up for success by setting a budget to equalize scheduled payments over the ‘no interest period’ so that your purchase is paid in full by the time interest may kick in. If you keep yourself accountable, then the offerings can be quite beneficial rather than taking lump sums from savings or overspending.”

So whether you choose to commit to a BNPL plan or hold off on that purchase until you have the money saved, understanding the pros and cons of this financing option can help you make the financial decision that is right for you.

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