The Lowdown on Buy Now Pay Later (BNPL)

If you follow the FinTech space at all, you may have heard of these new payment schemes called ‘Buy Now Pay Later’, or BNPL for short. What are they, the 21st-century version of predatory payday lenders? 

Keep reading to find out… 

What Actually is Buy Now Pay Later?  

Buy Now Pay Later (BNPL) is a new lending scheme that’s been coined “point-of-sale credit”. With BNPL you request credit right before making the transaction and are approved for a credit amount that is exactly equal to the purchase price (somewhat comparable to how a charge card works).

The other component of BNPL financing schemes is the splitting of your payments into installments (or a payment plan). This is one thing that separates BNPL from credit cards – instead of a single hit to your credit card, you make payments on a predetermined schedule. With most BNPLs, this schedule is four biweekly payments. So for example, if you buy a $100 item, you are obligated to pay $25 at the point-of-sale, and another $25 every two weeks thereafter.

What is the catch? As with credit cards, there can be interest and fees for late payments. Read the fine print, as each company’s terms differ slightly. For example, Afterpay has no interest or late fees, but many other services do charge interest (usually but not always at a low rate).  

Most BNPL loan lenders partner with specific retailers, meaning you can only use their payment schemes at specific stores. Others partner with retailers but also allow you to generate a virtual credit card to use for any online or in-store purchase. However, be wary of whether this imposes installment fees. For example, Quadpay charges $1 for each installment if making a purchase at a non-participating retailer. Meanwhile, Klarna does not. 

Below we have a table compiling and comparing many BNPL companies available in both Canada and the United States. 

Major BNPL Services Operating in Canada and/or the USA 

Travel-specific BNPL Services

How Do BNPL Companies Make Money?

BNPL companies make money primarily by charging retailers a small percentage of each sale transacted through their service. This is not unlike how credit card companies make processing fees through merchants. 

You can imagine this percentage must be the same or greater than credit card processing fees, otherwise, the BNPL would be taking a loss on each transaction.  

Some BNPL companies also make money by charging installment fees, late payment fees, and interest charges. 

How Can BNPL Affect My Credit Score? 

In general, we have to distinguish three potential ways credit or loan companies such as these could affect your credit

1. Hard pull from credit bureaus on signup
2. Reporting the loan account to the credit bureau, monthly
3. Sending the account to a third-party debt collector for payment on a defaulted loan

When using the ‘Pay in four payments’ scheme, BNPL companies will usually not do a hard pull but may do a soft pull, which will not affect your credit score. This varies by the company, however, and you should always check their T&Cs/fine print before signing up. 

BNPL companies may report the open account to the credit bureaus. This can affect your credit score for better or for worse.

Related: How Do Credit Cards Work? 

And of course, if you default or do not pay your BNPL payments, the account will be sent to debt collections which absolutely will negatively affect your credit score. DO NOT let this happen, pay for everything on time! 

I have collected the following data points on what types of credit checks are done by some of the BNPL companies. However, it is incomplete and could be subject to change. YMMV.

* PayBright will do a hard credit check for Monthly Payment plans or when using PayBright Virtual Card. For ‘Pay in 4’, no credit check is required. 

So, Who Should Use BNPL? What is the Advantage?

Many reading this may wonder what is the point of BNPL? Especially when these advertise their acceptance of credit card payments, aren’t you just abstracting another layer of debt? 

As far as I can tell, there are three strong use cases for using BNPL:

1. Most BNPLs may offer lower interest rates than credit cards. Some such as Uplift even offer simple (non-compounded interest). However, this advantage should only be utilized for must-make purchases, as paying interest on purchases is never recommended. 

2. Spreading a purchase over multiple paychecks/paydays. And this makes more sense if you’re paying with debit and not credit (see above meme). It also requires you to keep track of the money you have coming out of the next paycheck, which can be a lot of mental math each month. If possible, it may make more sense to sync up purchases with your credit card billing period instead (although BNPL would still offer you 6 weeks to pay the full amount instead of 30 days).

3. If the BNPL offers some sort of cashback or promotion, you may be able to ‘double dip’. To be honest, I haven’t seen this offered on any BNPL in North America, but what first alerted me to BNPL was an article by FlightHacks, where he mentioned ZipPay offered 3% cashback. Perhaps as the financial viability of these companies becomes more proven we will see similar promotions in North America?

Who Shouldn’t Use BNPL?

On this blog, we are a big proponent of smart and frugal finance. We cannot recommend anyone use BNPL or any form of short-term lending to make purchases they would not otherwise be able to afford. Booking a trip or making a purchase that you don’t have money for is a poor choice and will cost you more in the long run. Some would even say that BNPL financing options prey on those with lower levels of financial literacy.

There is a saying (I’m paraphrasing): “debt best serves those who don’t need it”. 

Vacations in my view, remain something that should be saved and budgeted for. And, with the help of this and other travel hacking blogs – subsidized by credit card rewards. But credit card rewards only work when you pay your balance in full and on time! The same can be said for BNPL.

Another point I want to briefly mention. One advantage of using credit cards for travel and purchases is the generous insurance coverage they provide (especially the World Elite and Visa Infinite level cards). When you start to abstract your purchases onto BNPL plans, the validity of any credit card insurance may start to get a bit…murky. Keep this in mind when you consider using BNPL.

Frequently Asked Questions