How buy now pay later works

"Buy now, pay later" for online shopping has become quite the trend here in Canada by offering shoppers a new way to purchase the items they want, without owing the full amount upfront. So, how exactly does buy now pay later work? What are the benefits and potential drawbacks of this financial service? We answer all these questions and more for you, down below.

What is buy now pay later and how does it work?

Buy now, pay later is a type of short-term, instant money loan in which you can pay for your purchase amount over a repayment term divided into equal installments with no interest charges rather than paying the full amount upfront when you shop online. While you'll mostly find that online merchants offer BNPL services, this alternative payment method is also offered at some in-store locations.

Now, as an example, let's say when you shop online, you opt for a buy now pay later service for your larger purchase that costs $1000. Once your application is approved by the third-party BNPL business, you'll need to pay a total of $250 today and the remaining amount throughout your payment plan. In this case, you'd owe another $250 the following two weeks, and so on, until the entire $1000 is paid off after six weeks. However, for larger purchases, you may have the option of monthly installments instead, depending on the provider.

What buy now pay later businesses are in Canada?

Depending on which merchant you're shopping with, when you proceed to checkout, you'll likely see at least one of the providers listed below:

• KOHO

• Sezzle

• AfterPay

• Klarna

• PayBright

• Affirm

• Affirm

Keep in mind that each of these providers has their own terms and conditions. So, remember to read the fine print for a better understanding of their late fees and other potential costs.

How do I get buy now pay later services?

Once you've added the items you wish to purchase to your online cart, here's what you'll need to do to access buy now pay later services:

1. Proceed to checkout

First, click on "Proceed to checkout." This will redirect you to a new browser window where you'll need to fill out your name, address, email, phone number, and other personal information.

2. Opt for buy now pay later

Once your personal information is entered, you'll find a list of payment options accepted by the merchant. If buy now pay later is offered, click on the link to be redirected to the provider's third-party website.

3. Soft credit check

Now that you've been redirected, you'll need to fill out an application form and agree to a soft credit check, which takes a look at your credit score to determine whether you are eligible for the buy now pay later service. If you are eligible, the terms of your repayment plan will be outlined on your screen, including whether any fees are charged for missed or late payments. An outline of when your monthly payments are due at that time will also be there.

Note that once you've been accepted by the provider, you won't have to send in separate applications in the future.

4. Make your payments

Lastly, now that your buy now pay later has been approved, you'll make your first payment and continue to make your monthly payments bi-weekly or monthly from there on out.

What are the benefits of BNPL services?

If you're still a little bit skeptical about buy now pay later and how this type of service can help you budget your monthly plans for spending and saving, take a closer look at the potential benefits you could experience by using this payment plan at checkout:

No hard credit check on credit report

Unlike other types of loans, buy now pay later providers only perform a soft credit check on your credit score, which won't lower or impact your report.

Interest-free payments

Unlike how a credit card functions or a loan, where you're charged interest on the purchases you make, buy now pay later offers users interest-free payments, meaning you won't have to pay any more than the original purchase amount, kind of like using your debit card to withdraw money from your chequing bank account.

So, if you want to avoid high interest rates on your credit card, this type of solution for your everyday purchases may be worth it.

Get quickly approved

Buy now pay later providers approved users within seconds. And, once you're deemed eligible to use the service, you won't have to reapply every time you checkout, making the entire experience incredibly convenient.

Purchase more

Whether you're tight on cash for the month or like the idea of splitting a larger purchase into interest-free payments through a payment plan, BNPL allows you to make more purchases without having to face the initial brunt on your bank account, revolutionizing how Canadians manage payments month-to-month.

So, what's the catch with buy now pay later?

There's no denying that buy now pay later services offer some pretty cool benefits to those who like to do their shopping online. But, like any type of financial service, we have to draw your attention to some of the potential downsides that could impact your finances. Take a look below:

Repayment terms and fees

Remember, buy now pay later payment options are still technically a type of loan, as you get a cash advance for your purchases when you check out. This means that there are terms and conditions associated with your monthly payments. So, while you won't have to pay interest charges, you will be charged fees for any missed payments you make on your loan over the next couple of weeks or months.

Similar to how you'd avoid paying credit card interest, you can avoid late fees with buy now pay later by either setting up automatic payments through your banking app or setting a calendar reminder in your phone for the remainder of your schedule.

Could hurt your credit score

Many buy now pay later providers report to credit bureaus in Canada. So, if, for some reason, you are unable to make your monthly payments, this information will be sent to the credit bureaus, which can lower your credit score over time and put you in debt.

If you're not sure where your current score stands, you can get a free credit score check with KOHO.

No prepaid cards allowed

Unfortunately, if you're planning on using your virtual card for online shopping from KOHO, you won't be able to opt in for BNPL payment options, given that the prepaid Mastercard may have no funds on it by the time you need to make your monthly payments.

Shopping guilt

Lastly, because the entire purchase amount is not withdrawn from your account like a debit card or posted on your credit card, it's easy to go overboard when shopping. Not only can this type of payment option push you into a cycle of debt, but it can also lead to shopping guilt and other feelings of anxiety when your payments get out of control.

Will I still be approved for buy now pay later if I don't have a good credit score?

As we said, these services require a soft credit check to determine whether you qualify. Whether or not you're approved for buy now pay later depends on what provider you're applying with. Each business has its own minimum score requirement, so your eligibility can vary between providers.

Should you have a lower credit score, don't feel discouraged and avoid applying anyway. There's nothing wrong with going through the application process and seeing what happens. Remember, once you're accepted, you won't have to reapply.

Can I pay off my installment before the end of my payment plan?

Yes, most likely, you'll be able to fully pay off your monthly payments before the end of your repayment term without incurring any fees, given that your payments are interest-free. However, there is still a possibility that paying off the loan beforehand has some consequences.

We recommend reading the terms and conditions provided to you at checkout to confirm whether or not any fees will be applied to your account should you choose to pay off the money quicker than the schedule provided to you.

How should I choose a buy now pay later provider?

When you go to checkout from an online store, you may come across the option to choose between one or more BNPL providers. So, how do you choose? What should you pay attention to? Here's what you should be asking yourself:

1. Do they require a soft or hard credit score check?

2. Is your payment information sent to bureaus in Canada each month?

3. What late fees does the provider charge?

How do businesses benefit from buy now pay later?

If you're a merchant in Canada, you may be wondering whether offering this type of service to your consumers is the right move. In many ways, buy now pay later can help drive business to your store by offering consumers payment alternatives that make them more inclined to make a purchase.

Another benefit is that it comes at no risk to you as a business. The provider you choose to partner with is responsible for handling all transactions, which means they assume the risk if a customer misses a payment, meaning you still get paid regardless.

Are there alternatives to buy now pay later?

Buy now pay later isn't for everyone. So, what other alternatives can you consider for your online purchases?

0% APR credit card

If you have a good credit rating, you may want to consider a 0% APR credit card. Some credit card companies offer 0% interest promotions to new customers for a certain period, which can range from a couple of months to two years. Along with interest-free offers, you may also receive cash back and other rewards.

Personal loans

If you need to make a larger purchase, a small personal loan may also be a good option. Personal loans offer more flexibility in terms of repayment terms and credit limits. You can also qualify for these types of loans with all kinds of credit scores, making them more accessible to those with lower scores.

Buy now pay later with KOHO

With KOHO's buy now pay later, Canadians can streamline their checkout experience and manage their monthly budget with ease. With KOHO, you're able to pick past purchases you've made up to $1000. Then, you have the freedom to choose your payment plan, whether it's bi-weekly or monthly. Once you've found a schedule that works for you, KOHO will handle all the details, making sure you understand the terms and conditions of your payment schedule, which you can conveniently track through your KOHO mobile app!

The bottom line

For those with sound money management practices, buy now pay later is a great way to space out monthly expenses on everyday purchases. However, the risk of getting carried away is still a possibility.

If you're not convinced that buy now pay later is right for you, we still have several financial products you can benefit from. Whether you want to build your credit with KOHO by opening a virtual credit card with overdraft protection coverage or make a return on the money you're saving for the future with our high-interest spending account, KOHO has something for everybody!