Buy now, pay later – Is a payment plan right for you?
These days, nearly every online retailer is offering a payment plan option. Here's what you should know before you give one a try.
CIBC
Sep. 11, 2022
5-minute read
It seems like anything can be bought on a payment plan — also known as a Buy Now, Pay Later (BNPL) program. And what's not to love? Pay less today, get your purchase and then deal with a few easy payments in the future. Seems like a win-win, right?
If you didn’t know, a BNPL program lets you split a purchase into multiple, smaller chunks to be repaid over a period of weeks or months. What makes them appealing is that many — but certainly not all — offer 0% interest on your payment plan. While these plans can be a great way to manage your finances and still get what you want, it's important to step back and look at the big picture to make sure the plan works for you.
Learn more about how payment plans work and decide if it's the right choice for your next purchase.
Pros and cons of Buy Now, Pay Later plans
Easily accessible
For the most part, your credit score is usually not a barrier to using payment plans. Signing up is convenient, often done in-person or online and right at the checkouts of a growing number of retailers.
Low or zero interest
Little to no charge for borrowing money? That's an obvious plus (but note the fine print!)
Financial flexibility
Paying less upfront means you can keep more cash on hand and puts less stress on your wallet in the short term.
Interest charges
Yes, we said many programs don't charge interest, but not all of them.
Late fees
Missing a scheduled payment may cause a late fee to kick in or various other penalties that will cost you.
Overspending
It can be easy to get carried away and spend more than you can afford.
Remember to read the fine print
The specific terms offered by payment plans will determine whether they’re a good fit for you. It's important to understand exactly what you're signing up for so there are no surprises down the road. Some important things to look out for when considering a payment plan are interest charges, late fees and miscellaneous charges like a one-time registration fee.
Will a payment plan affect my credit score?
Your credit score is an important part of your financial identity. A moderate to high credit score can open new, more attractive options for borrowing, while a lower score can make it harder to get approval for a credit card or financing for things like a car or mortgage.
While signing up for a payment plan is unlikely to have a big impact on your credit score, little things can add up, so it's a good idea to understand how joining a plan can affect your score.
Within the fine print of your payment plan agreement, you'll find details on how the program performs credit checks and what they report to the credit bureaus.
These details vary by provider, but the key point is whether it does a hard or soft pull on your credit rating — a hard pull can temporarily drag down your credit score.
Also, keep in mind that some programs won't report your on-time payments to the credit bureaus, so they won't contribute to improving your credit score.
Think beyond this month's budget
One of the biggest attractions of a Buy Now, Pay Later program is that it decreases the initial hit to your wallet. For example, instead of paying $2,400 for a laptop today, you're only paying $600 now and you get your new laptop right away. The important thing to remember is that ultimately, you're still on the hook for the full price.
You should have a clear plan to make your payments each month. Sure, the initial $600 payment may fit into your budget this month, but does the overall $2,400 cost fit into your budget for the year?
The key is to steer clear of impulse purchases and realize where payment plans can give the greatest benefit, which is with purchases that are already built into your budget.
Did you know?CIBC Pace It™ is an installment payment feature available on most CIBC credit cards. It lets clients convert planned or unexpected eligible purchases ($100 or more) into installment plans and spread payments over a fixed term with a lower interest rate (versus a standard credit card APR). No added credit checks or approvals are needed, as your Installment Plan works within your approved CIBC credit card limit.
Managing your BNPL purchases
If you've weighed the pros and cons of payment plans and are thinking of diving in, take the time to make sure you're doing it right.
3 key actions to take when it comes to Buy Now, Pay Later plans:
- Make careful notes of the terms — such as interest and late fees — for each purchase and the due dates for payments.
- To make sure you don't miss any payments, the safest option is to set up auto-payments from your bank account, so that you'll avoid late fees.
- As with any financial budget, keeping track of the numbers is critically important. It might help to use a budget calculator. Taking an organized, thoughtful approach to your use of Buy Now, Pay Later payment plans will help you enjoy all the benefits that they offer.
Need some financial advice?
Book a chat with one of our advisors. They can help set you up for success, today and into the future.
