Buy Now, Pay Later: A Recipe for Overspending or a Necessary Palliative?

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Tercel Keepness used a ‘buy now, pay later’ plan to buy motorcycle pants from an Australian website, which allowed him to pay in installments, instead of putting them on his credit card and paying interests.RAFAL GERSZAK/The Globe and Mail

Last year, Tercel Keepness found a pair of motorcycle pants on an Australian website that they wanted to buy. When she went to checkout, her online shopping cart gave her the option of using a buy now, pay later (BNPL) service – short-term financing that allows users to pay for their purchases by several times. It sounded like a bargain to her, so she paid four installments of $76 for the pants rather than the original price of $300.

It worked for Ms. Keepness, so a few months later she used BNPL to buy an Apple laptop.

The 34-year-old Vancouverite says she chose this option instead of putting purchases on her credit card, which carries a high interest rate because BNPL services are often interest-free.

“I do not use [BNPL] all the time, but it’s definitely a good option if I need something and don’t have the money right now,” says Ms. Keepness.

She is not alone. While Canadian consumers have been a little slower to adopt these services than their US, Australian and UK counterparts, this is no longer the case.

There has been a substantial increase in the use of BNPL services in Canada over the past two years, particularly among the younger population, who say they use the service as a financial stopgap when they want something and don’t have not the money or want to maintain higher liquidity. But experts say these services could have significant financial consequences as they could mask an individual’s existing money problems.

BNPL payout in Canada is expected to grow by 63.5% on an annual basis and reach US$5.95 billion in 2022, according to the BNPL Q4 2021 survey from Research and Markets. People between the ages of 25 and 44 showed the greatest interest in BNPL, with around 65% saying they would consider this option for their online purchases, according to a 2020 survey by Statista.

As for the reasons why? Respondents to a recent Financial Consumer Agency of Canada survey said the most common reasons for using a BNPL service were to: help with budgeting (42%); because they could not afford to pay for the entire purchase right away (39 percent); avoid interest and fees (23%).

The appeal of this type of service makes sense in times of high cost of living, inflation and the din of impending recession, which is why thousands of Canadian retailers have jumped on board, including Canadian Tire, the Bay from Hudson and Lululemon. Amazon.com and Square also made headlines in September after making BNPL services available to their customers. But, depending on the service chosen by the user, there could be financial penalties and drastic interest hikes if the user fails to make a monthly payment.

This concept of payment by installments is not entirely new; the idea of ​​buying on “layaway” has been popular for decades as a way to buy anything from clothes to furniture. But there’s a fundamental difference between layaway and BNPL that Bruce Sellery, CEO of Credit Canada Debt Solutions in Toronto, says is problematic: “Buy now, pay later doesn’t delay gratification.

“The genius with the layaway system is that you put the item behind the counter, and you can visit it or look at it out the window, but you can’t take it home until you’ve made all your payments. “, he explains. , “but with buy now, pay later, it supports the culture of instant gratification that we’re already too used to.”

Mr Sellery says he fears that by using the service consumers are masking existing cash flow problems by making their financial lives “muddy”.

“It comes down to this question: are you living within your means? It’s a little hard to say. He adds that BNPL services, like credit cards, do not look like a person’s money and therefore do not hurt in the same way as using cash, and it’s a recipe for overspending.

Indeed, nearly 70% of BNPL users admit to spending more than they would if they had to pay for everything upfront, according to a 2022 survey by US online lender Lending Tree.

But some say that while there’s reason to be wary of overspending with these services, they can provide a much-needed function in times of financial hardship.

Ryan Brough, managing director of Gratify, a Vancouver-based BNPL service that launched a few months ago, says he built his business around the idea that this payment method could “really help people.”

“A higher cost of living has had an impact on all of us,” he adds. “A year ago people might have been spending more on discretionary spending on BNPL, but what we’re seeing now is people buying slightly larger items that they might like or need. – like home services, when you need a new roof, or things like online courses – which are meant to improve their home or their life.

Mr Brough explains that Gratify has partnered with several institutions that offer different courses like beauty courses so that people can pay for these courses in installments instead of taking on the price of tuition all at once. .

“We are seeing news from Australia and the UK talking about the need for regulation to stop people overspending and I absolutely agree with that,” he adds. “The industry needs to be regulated or BNPL vendors need their product features to…stop advertising to people to encourage them to buy more stuff.”

As for Ms. Keepness, she says she has no intention of using BNPL’s services for everything, but she’s certainly glad it’s there.

“It’s a good option if you’re living paycheck to paycheck, which a lot of people in Vancouver do,” she says. “Because big purchases can take a huge chunk out of your bank account.”

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