Debt Relief Experts
If you’re using Buy Now, Pay Later (BNPL) services to manage your purchases, you’re not alone. While these programs seem to offer a simple way to split payments, they can quickly lead to financial challenges when not managed carefully. As Licensed Insolvency Trustees, we’re seeing more Canadians struggling with BNPL debt combined with other forms of credit, leading to serious financial difficulties.
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How Buy Now, Pay Later Loans Work
When you use Buy Now, Pay Later, you’re taking on short-term financing that splits your purchase into smaller payments over 4-6 weeks, usually without interest. While this might seem like a convenient way to buy what you need now, it’s important to recognize that BNPL is a form of debt that needs careful management.
In Canada, you are likely using one of seven major companies provide BNPL services: Paypal, Affirm, Klarna, Afterpay, Sezzle , PayBright and Zip. You might be attracted to their promise of easy payments and interest-free grace periods. However, if you’re using BNPL to stretch your budget or make purchases you can’t afford, you could be heading toward financial difficulty.
Types of BNPL Plans
When you’re considering using BNPL, you’ll encounter several types of payment plans:
Equal payment plans allow you to make regular installment payments until the balance is paid in full. You make your first payment at checkout, then the remaining balance is divided into equal payments – typically four to six installments spread over 4-6 weeks.
Deferred Payment Plans allow you to choose when to make payments as long as the balance is paid off by a specific due date. These plans typically advertise a “don’t pay until’ type of event. While these plans may advertise no interest if paid by the due date, they usually include administration fees. Failing to pay the full amount by the deadline typically converts your purchase into an installment loan with high interest rates.
Credit Card Post-Purchase Installments Major credit card issuers have entered the BNPL space by allowing cardholders to convert individual purchases into installment plans after the fact. You can select eligible transactions and spread the payments over 3-24 months. While some issuers offer promotional 0% APR periods, most charge a lower interest rate than your standard card APR, plus a plan setup fee. These plans offer more flexibility in payment duration than traditional BNPL, but the purchase remains on your credit card line of credit and affects your available credit until paid off.
Benefits and Risks of Buy Now, Pay Later
Before using Buy Now, Pay Later for your next purchase, consider how its advantages and disadvantages might affect your financial situation. Like any form of credit, BNPL can be helpful when used wisely but can create financial stress if not managed carefully.
Potential Benefits
- Interest-free payments when paid on schedule
- No impact on credit score for regular use
- Automatic scheduled payments for easier budgeting
- Immediate access to needed items without full payment
- Quick approval process without traditional credit checks
Hidden Risks
- Increased spending – Users are more likely to increase basket sizes when using BNPL options
- Late payment fees and potential high interest charges
- Credit score damage from missed payments
- Overdraft fees if automatic payments exceed bank balances
- Complicated refund processes while payments continue
- Difficulty tracking multiple payment schedules
- Encouragement of impulse purchases
- Risk of overlapping payment obligations
How BNPL Can Affect Your Credit Score
If you’re using buy now pay later thinking it won’t impact your credit, you need to know that missed payments can seriously damage your credit score. Here’s what happens when you use BNPL:
Credit Check: Most BNPL services don’t do a credit check so taking out BNPL usually has not impact on your credit score. However, if you’re applying for larger or longer delayed payment installment loans, the provider might do a hard credit check that will show up on your credit report.
Credit Reporting: Most ‘pay in four payment” BNPL loans are not reported to either Equifax or TransUnion. The result is that, similar to payday loans, owing money on multiple BNPL loans does not harm your credit score. However, this may change as credit bureaus and consumer protection agencies look for options to increase reporting on these types of loans given the growth in the market.
Making Regular Payments: Your on-time payments usually won’t help build your credit score because most BNPL providers don’t report information to credit bureaus.
If You Miss Payments: Missing payments can seriously harm your credit score. If you default on your BNPL agreement, the account may be sent to collections, which can damage your credit for up to six years.
If You’re Using Credit-Based BNPL: BNPL services that work with credit cards or offer credit lines will affect your credit utilization ratio, which could lower your credit score if you’re using too much of your available credit.
How BNPL Debt Accumulates
Recent research shows that 43% of BNPL users turn to these services because they can’t afford to pay for items in full at the time of purchase. What begins as an innocent way to split a single purchase into manageable payments can quickly become more complex as you make additional purchases, each with its own payment schedule.
A TransUnion whitepaper shows that you are more likely to use BNPL if you also carry credit card balances. Debt accumulates because you add BNPL debt on top of other credit. Credit card debt continue to grow after starting with BNPL, and this creates a risk of overextending financially.
In our practice, we’re seeing an increasing number of insolvency filings where BNPL debt appears alongside maxed-out credit cards and other forms of debt. This combination often indicates a pattern of using multiple credit sources to maintain unsustainable spending habits.
Watch for these warning signs that your BNPL use is becoming unmanageable:
- You have multiple active BNPL accounts you’re trying to juggle
- You’re using BNPL for basic necessities like living supplies and groceries
- You’re regularly paying late fees
- Your credit card balances are growing while using BNPL
Managing Buy Now, Pay Later Responsibly
While Buy Now, Pay Later plans can be a useful payment tool, they require careful management to avoid financial difficulties. If you choose to use BNPL services, following these guidelines can help you maintain control of your spending and avoid payment problems.
Before accepting another BNPL offer:
- Calculate the total purchase cost, including all fees and potential late charges, before accepting any BNPL offer
- Save BNPL for planned purchases rather than impulse buying
- Review your budget to confirm you can afford payments without using additional credit
- Limit yourself to one BNPL agreement at a time to maintain clear oversight of your obligations
To manage current BNPL payments:
- Create a dedicated payment calendar and set reminders for all due dates
- Set up automatic payments, but ensure you maintain sufficient funds to avoid overdraft fees
- Read all terms and conditions, particularly regarding late fees and missed payments
- Keep detailed records of each BNPL agreement, including payment schedules and confirmation numbers
Solutions for BNPL Debt Problems
Short-Term Strategies
If you’re finding it difficult to manage your BNPL payments, there are several immediate steps you can take to regain control of your finances:
- Contact BNPL providers about payment extensions or modified payment plans
- Consider a low-interest personal loan to consolidate multiple BNPL debts
- Review your budget to find extra money for BNPL payments – look at reducing non-essential expenses, using savings, or earning extra income through overtime
Consider alternatives for future purchases including:
- Save for purchases in advance
- Use store layaway programs that don’t charge fees
- Explore zero-interest credit card offers with fixed terms
- Negotiate directly with retailers about payment plans
Long-Term BNPL Debt Relief Solutions
If you’re finding it impossible to manage your BNPL debt, especially alongside other debts, it’s time to talk with a Licensed Insolvency Trustee.
A consumer proposal can consolidate all your debts, including BNPL obligations, into a single monthly payment, often at a reduced amount. This legal process stops collection actions and provides a structured path to debt freedom.
At Hoyes Michalos, we offer free consultations to review your situation and explain your debt relief options. Contact us today to discuss how we can help you regain control of your finances and develop a plan for a debt-free future.
