Does Buy Now, Pay Later cost you money?

For this week’s Reality Cheque, we’re looking at the money myth about the costs of BNPL financial programs in Canada.

By Ian Portsmouth

If the opportunity to pay in interest-free installments seems to be everywhere you shop, your mind isn’t playing tricks on you. But the option to Buy Now, Pay Later (BNPL) could be playing tricks on your mind.

What was a niche e-commerce feature less than a decade ago is now offered by both online and bricks-and-mortar sellers of everything from fast fashion and food delivery to concert tickets, hotel stays and even dental care. The upstart financial technology companies that pioneered BNPL in Canada—such as Affirm, Klarna, Afterpay and Sezzle—have been joined by more traditional financial firms, like credit card providers and payment processors. BNPL is everywhere.

Lenders of these short-term, pay-by-installment loans say flexibility, convenience and affordability are the primary benefits of BNPL. They provide flexibility in that they allow people with financial timing challenges (e.g., in-between paycheques) to acquire goods and services.

People use them because they’re convenient. Opening an account is a one-time process that often takes minutes and, typically, doesn’t depend on or impact credit scores. BNPL loans can be affordable, too, with no fees or interest if the agreed payments are made on time. And it can make sense for some Canadians who don’t yet have a credit card, say you just got a job, need office clothes, and plan to pay the debt off with your first paycheque.

But if you find yourself clicking the four-easy payments without even realizing, and have multiple accounts with different BNPL providers, know that there might be a few reasons why. A growing body of research suggests that BNPL is designed in ways that exploit common cognitive biases, encouraging users to buy more often and spend more per transaction—particularly younger Canadian shoppers and those with lesser financial means, including those who don’t have access to a credit card. This leads some BNPL users into financial trouble. By understanding the science behind it, you can resist BNPL’s charms.

What makes BNPL different from other forms of credit

At first glance, BNPL is nothing more than a new spin on old ideas, such as credit cards’ and retailers’ own installment plans. Indeed, all of these financing options take advantage of a cognitive bias called temporal discounting: the perception that a reward today is more valuable than the same reward in the future. 

Or, conversely, that a cost today is more painful than the same cost in the future. Temporal discounting helps persuade us that buying now and paying later is better than buying now and paying now, even when all other things are equal.

So, what makes BNPL particularly powerful?

Price partitioning and installments—buy more, spend more

“Where these new players have come in and changed the game is with price partitioning and installments,” says Kristen Duke, an assistant professor of marketing at the Rotman School of Business who studies financial decision-making. 

These two features are most apparent in the “pay in four” plans you see with most BNPL offers. Typically, that plan divides the total price into four equal, interest-free payments made every two weeks over six weeks, with the first payment at checkout. 

Even though the total price is the same, says Duke, “the psychological addition of each of those smaller amounts feels less than the psychological payment of the total amount.” 

Known as the numerosity effect, this weakened sensitivity to the total cost happens even when the total amount is displayed alongside the per-instalment amount. At the same time, seeing the detailed breakdown of the bill by payments and their timing  creates a stronger sense of budget control—the ability to categorize and track expenses—than does presentation of the full price alone.

According to influential research published in the Harvard Business Review in 2024, these perceptions of lower cost and higher budget control reduce perceived financial constraints, which is academic-speak for “I can’t pay for this right now, but I’ll make it work.” This leads BNPL users to buy more often, and spend more per transaction.

Since then, BNPL prompts have spread from online checkout tabs and shopping baskets onto the individual product-info pages, where they can nudge the consumer early in the shopping experience. Perhaps that’s because retailers have learned that the mere presence of a BNPL option can increase purchase intention among shoppers, even if they neither use BNPL nor intend to use it.

How to resist BNPL temptation

Behavioural experts believe that simply being aware of the design of BNPL and how it’s presented is one key to resisting its allure.

“If you know that a marketer is framing information to make it more appealing to you, you can reframe it for yourself,” says Duke. “You can decide whether you can afford the lump sum today. If that answer is no, then putting the payment off is probably not in your best interest financially.”

Cynicism can be helpful, too.

“Consumers can start with the same skeptical stance they have when they encounter a salesperson or see an advertisement,” says Duke. “What are the other party’s motives here?” 

Recognize how do BNPL companies make money

Even if BNPL providers genuinely want to make our lives easier and more affordable, they’re also in it for profit. They get some revenue from borrowers, typically in the form of late fees on overdue payments or interest charged on longer-term installment loans for large purchases (e.g., when you see an offer for 12 monthly payments at 9% interest). 

But they make most of their income from their business customers, who pay fees equivalent to 2% to 8% of every BNPL-funded transaction. (By comparison, credit card issuers charge around 3%.) These companies sacrifice this substantial slice of the pie because BNPL users spend more than they would otherwise.

Recognize how many purchases you make

For consumers, it also helps to understand the common BNPL pitfalls, such as taking out too many loans in a short period of time, making them harder to stay on top of. 

Even worse for monitoring a budget is “stacking,” whereby you use multiple BNPL accounts for multiple purchases at the same time. (That’s when paying cash, saving up or even using a credit card installment plan can help you keep track of your spending.) Although each provider will impose a spending limit on you, most don’t do a “hard” check of your credit history or credit score, making it easy to open accounts with several firms, lose track of overlapping payment schedules and overextend yourself. 

These risks are compounded by the fact that BNPL is increasingly accepted for small, everyday purchases. You’re unlikely to forget the TV you financed last month—but you may not remember every burrito you’re paying in four installments.

Take the 10-day test

Another defence against BNPL is both time-tested and incredibly simple, although it takes a bit of willpower. When you see something you want but don’t truly need, put it back on the (virtual) shelf for 10 days. Or try even for one day. Research consistently shows that even a short cooling-off period can significantly reduce impulse buying and general purchase intent. 

Buy Now, Pay Later can facilitate impulse buys with its flexibility, convenience and affordability. Slowing the process—even just a little—can help break the spell of BNPL and the risk of misusing it.

Ian Portsmouth is an award-winning writer and editor specializing in business and personal finance. He is based in Toronto.

Read more from this issue of The Get:

1. How to invest in cottage real estate like a Hollander
2. MVP: Game Stop: The money lessons Canadian athletes learn
3. When travelling, should I pay in Canadian dollars on my credit card?
4. Here’s one way to reduce your grocery bill

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