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Credit Karma’s guide to Buy Now, Pay Later

Written by: Credit Karma Staff
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In a Nutshell

Buy Now, Pay Later plans allow you to pay for goods and services over a set period of time. As with most forms of credit, it can be a helpful option if you know you can afford the installments, but late fees and fines can be hefty.

 

What is it?

A Buy Now, Pay Later plan allows you to purchase products and services without having to pay for it in full right away. You may have already heard of this type of payment plan under another name, such as retail financing plans, retail credit services or installment loans. They may have different payment models available but they all allow you to pay later.

Traditionally, Buy Now, Pay Later plans have been used by consumers to finance large purchases, such as electronics and furniture. Now with the rise of companies like Klarna and Afterpay, more and more customers are using Buy Now, Pay Later services to cover the costs of smaller purchases – even take out in some cases. In fact, by 2024, Buy Now, Pay Later sales made up 6% of the Canadian e-commerce market.

How does it work?

There are two types of Buy Now, Pay Later plans; the equal payment plan and the deferred payment plan.

Equal payment plan: This involves making regular payments at a regular frequency. You might see this referred to as ‘installment payments’.

Deferred payment plan: This means that you need to pay the balance by a pre-agreed date. There are no set payment installments in this plan.

Both of these types of plan generally include an agreement with the retailer, who you purchase the product or service from, and an agreement with the financial service provider who provides the financing.

Is it right for you?

Before entering into a Buy Now, Pay Later agreement, you should remember that this is a credit agreement just like a credit card or loan. It’s possible that because these options appear at the point of sale, they might seem more casual, or less of a serious commitment, but missed payments can hurt your finances just as much as that of a card or loan.

You could also compare the positives and negatives of buy Now, Pay Later, so that you can decide whether this is the right option for you.

Pros:

You can purchase big ticket items that you need and pay them off over a length of time that fits your budget.

You may be able to take advantage of a low or even 0% interest rate for a promotional introductory rate.

Cons:

It can be an expensive way to finance a purchase if you miss a payment

Fees may apply – which could mean you end up paying more than the retail price for the item or service you’re purchasing.

It could encourage you to spend beyond your means or make impulse purchases.

As with any form of credit, missing a payment can have a negative impact on your score and affect your future borrowing.

Finally –

Before you take out any form of credit, it’s important to think about whether this is the right move for you and your finances at this time.