‘Buy now, pay later’ plans are booming while young people struggle with expenses – and some may lose control

Thanks to the rise of ‘Buy now, Pay Later’ (BNPL), consumers can split all kinds of purchases in interest-free periods by clicking a button-very often without credit control or just a soft credit control.

Nowadays, BNPL lenders such as Klarna, Sezzle, AfterPay and Affirm can be found at cash register throughout the country. They work together with popular retailers such as Ticketmaster, Sephora, Amazon and Costco, and have therefore seen a large increase in users, especially among Gen Z and Millennials.

The share of Canadians who have completed a purchase in the store or online using a BNPL service rose to 25 percent in 2024 of only nine percent in 2022, according to Payments Canada, the organization that operates payment clearance and settlement infrastructure in the country.

And by the end of 2030, the Canadian BNPL sector is expected to almost double the value of 2024 of $ 6.69 billion (US), to around $ 11.32 billion, The business research and markets based in Dublin projects.

Lenders say that they help young Canadians, many of whom start building their credit scores, access to smaller loans that are more manageable than traditional credit lines.

“We are the honor of training wheels,” said Patrick Chan, general manager of Sezzle Canada.

As the Canadian market quickly evolves, there is growing concern about young people who develop unhealthy spending habits with BNPL -Tools – especially when youth unemployment rises – while many feel pressure to maintain expensive, unrealistic lifestles that are promoted by sponsored digital influencers and social media.

People tend to see credit “as a tool that makes that lifestyle possible”, said Miranda Goode, a associate professor of marketing at the Ivey Business School that specializes in consumer behavior and debts.

With increasing costs of living, many of the things we want to buy today are not in our budgets, she added.

“That is just the reality for many people – you still want it and you are still going to do it (the purchase).”

Resident of Toronto, Leeyhan Dizon, 40, remembers the first time he used a BNPL service. It was a few years ago and he financed a jacket that cost around $ 500 (Canadian) from the Trendy Canadian brand Moose Knuckles.

“I was a working student at the time,” said Dizon, a consultant for work development at Brock University.

He was excited to make the purchase, he said, and felt even more motivated to work because he knew he needed the money to pay it off.

Then, a few months later, he received two pairs of winter boots with a different loan, and cost him around $ 400. Skin care and electronics purchases followed and Dizon soon noticed that he lost control of his loans.

“I would try to remember:” Why did I receive this deduction or why did I get a debit of this amount? ” Then I would remember: “Oh, yes, it’s because I have a Klarna payment” … and I would just be surprised. ”

“It can be addictive to be honest,” said Dizon. “Then you realize that you have spread yourself too thinly over these items, or purchases.”

The issue with BNPL comes down to human psychology, according to De Goode from the Ivey Business School.

By paying in installments, someone can give the feeling that they are less financially modest. “That’s why you make more frequent purchases with ‘buy now, pay later’. And you usually spend a little more,” she said.

“If I would spend $ 50 on Sephora, immediately from pocket, immediately and there, that would feel a lot worse than if I break it a little,” she explained.

But at the end of the day you still pay $ 50 – maybe more if you start missing payments.

Although paying in episodes is not a new concept, more consumers have been attracted to the offer of the loan of four “payment in four”.

The way in which these loans usually work is, instead of paying the full amount in advance, the consumer pays a quarter of the value when making the purchase. The remaining three equal payments are then charged every two weeks thereafter on a credit card, debit card or bank account.

Most BNPL lenders do not charge interest or costs for these loans if you pay on time, making them particularly attractive for borrowers.

According to Payments Canada, young and of middle age Canadians have 18-34 and 35-54 respectively, much more chance of using BNPL often than older Canadians.

But young Canadians seem to rely more on these services to buy supplies compared to middle -aged Canadians.

Although young people say that their main reason for using BNPL is the possibility to easily borrow or postpone payments, middle -aged Canadians mainly use budget, according to the data from Payments Canada.

Young Canadians also include buying food and groceries in their top three BNPL purchase categories in contrast to Canadians of middle-aged.

“The problem is that it is difficult to earn enough money in this country to actually keep your life,” said Licensed Insolvency Trustee Joshua Harris of Harris & Partners.

“This is only the next generation of payment daily loans … Baby Boomers, they just go to Money Mart because they are more comfortable with that.”

Harris said that, although he did not meet borrowers about shopping payments, he is increasingly popping up in bankruptcy and archiving applications. Often the loans about discretionary items are, he added.

“It is that sweatshirt you don’t need. It is the gadget for the kitchen that you certainly don’t need, and somehow people hold on to this.”

The star spoke with two BNPL lenders, Affirm and Sezzle, who claimed that they did not benefit from customers who overconsumed and fall back on their payments. (Klarna did not respond to requests for comment and afterpay refused to be interviewed for this story).

That is because most of their income comes from charging transaction costs for sellers, and not from late payment fines.

“Because we have very minimal costs if you miss payments, the reality is that we cannot survive unless people actually pay us,” said Chan, the general director of Sezzle Canada.

If someone misses an episode, Sezzle locks his account and stops it for further issued until they have made the payment and pay a “reactivation” costs of $ 10. SEZE also charges a “redeployment of convenience costs” of a maximum of $ 5 to enable users to postpone their payment for up to two weeks.

Wayne Pommen, Chief Revenue Officer for Affirm, said that while the Company offers a number of loans that charge interest, it does not collect late payment costs at all. “We take the full loss of not being able to collect the money that we have sent the retailer on behalf of the consumer,” he said.

It is difficult to know how common late payments are on these popular loans, because different entities report different statistics.

A study by the American company LendingTree showed that 41 percent of BNPL users reported to pay at the end of last year, an increase of 34 percent the year before. However, 76 percent of those people were only a week or so late.

“I would not say that that is more or less important than what we see with credit card debt,” said Goode in response to the findings of LendingTree. “I think that in the short term those late payments are probably less impactful on people’s wallet than the interest people gather from rotating debts.”

BNPL providers say that the majority of their customers pay on time or even early.

AfterPay states that 96 percent of Canadian users are diligent borrowers. In the meantime, Affirm reported in his last income that the proportion of customers that a payment on a monthly repayment loan was only 2.4 percent.

Nevertheless, research supports that people spend more on BNPL, even in comparison with credit cards, where retailers see a considerably higher sale and profitability.

A recent study published by the American National Bureau of Economic Research showed that BNPL increased sales by 20 percent when paying, powered by consumers with a low credit-thinking who are the least likely to repay their debt.

“It’s all about the incremental sale,” explains Perlin, director of research in payments, processing and IT services on RBC Capital Markets, in an article published by the bank in 2021.

“Retailers have complained for years about the costs of credit cards and the ultimate corresponding exchange costs that go with it. The problem is that tickets for general purposes are not currently stimulating another incremental sale,” Perlin wrote.

“But BNPL shows more than 20 to 30 percent lifts in incremental shares in checkout. And the average mand grottes go up above those levels.”

Asked if BNPL could encourage over -consumption in a way that consumers cannot put in dangerous debts, but may not help them to spend responsible, Chan said it is possible.

“Can anyone make sure someone thinks they should buy something that they might not have to? Yes, possibly,” he said.

“But I think people just have to be more, you know, thinking about how they spend.”