How do “Buy Now, Pay Later” Plans work?

Lately I have gotten several questions about what I call “buy now, pay later plans”.

You see them at the checkout when you buy something online. Depending on the store, you might see Pay Bright, After Pay or Sezzle.

To be honest, I’ve been skeptical of these options since they appeared to be yet another way for consumers to over-purchase and end up with things that they cannot afford. But, before casting judgement, I decided I would do my own research and find out for myself:

Over the past few weeks, I purchased three items from three different stores using the three “buy now, pay later” options:

Pay Bright:

This is managed by a Canadian company called Affirm. A quick look at their website shows a diverse leadership team, which I like. Their mission is to “deliver honest financial products that improve lives”.

After Pay:

This is an Australian company, and they say they are “deeply committed to delivering positive outcomes for customers”.

Sezzle:

This is an American company, and they believe “Financial freedom is a right, not a privilege”.  They also say: “We’re here to help you achieve financial freedom and take control over your finances so you can build your future”.

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They are all very simple and user friendly. At checkout, you get to choose from the regular payment options of gift card or credit card, but now, you also see the option of either Pay Bright, After Pay or Sezzle.

 

Here is a summary of all 3 programs:

  • 4 equal bi-weekly installments.
  • Or monthly installments for more expensive purchases (usually over $1,000)
  • No interest or fees.
  • No impact on credit score.
  • Easy automatic payments.
  • 2-step verification process.
  • Easy, simple and user-friendly signup.
  • You choose if you want to pay from your chequing account or from you credit card

 

I decided to do this research to see whether the above claims are true or not.

I did see some negative comments about PayBright regarding their return policy. With this in mind, I returned the item (winter boots) I bought using PayBright, so I could see firsthand how the return and reimbursement process would play out.

On October 12th I bought the winter boots online from Browns for $220.36 through the PayBright system, and I was immediately charged $55.09 on my credit card. Of note, I was notified via text and email about 3 times saying that my credit card would be charged and to ensure that I had money available to pay it.

On October 23rd, I returned the boots to Browns for a refund. The process was simple and easy and not at all different from a regular return. By October 28th the $55.09 was refunded to my credit card.

For the Sezzle and Afterpay transactions, I decided to keep the items and follow through with the whole process to see how it will play out.

I received the following texts the day before my payments were due:

Afterpay: “Your $29.38 Afterpay payment is due tomorrow! Please ensure your card has sufficient funds or pay now at afterpay.com”

Sezzle: “You have an upcoming payment of C$31.07 on 11/11/21 for your purchase with Bentley. For issues or details visit ….”

I also received emails from both of them confirming that my payment was received.

I found the process for all three, from sign up to payment, extremely easy and simple. They all have a 2-step security verification during the sign-up process.

So far, I have not been charged any interest and the amount that I’m paying per installment is exactly the total price divided into 4.

Credit Score:

All three companies claim that while they will check your credit in order to qualify you, this will not affect your score.

I checked my credit score just before making these purchases and I have been monitoring it since then. Thus far, my credit report and score has not been negatively affected.

Merchant fees:

These 3 companies are all competing for the same merchant fees that credit card companies charge. This is usually 2% – 5%.  This is the reason why consumers don’t pay any interest on their purchases. Charging the merchant fees is how these companies make their money for offering this service to free to consumers.

Points to note:

  • It appears that the consumer does not pay any interest on their purchase provided that the payment is paid as agreed (the agreed date and amount). Missing a payment or paying late does incur interest, but the amount charged appears to be on a case-by-case basis.
  • If you use your credit card for payments, you will most likely end up with two installments on one credit card statement. So, while you will be paying the “buy now, pay later” company in two installments, your credit card company will require you to pay whatever shows up on that billing cycle. And of course, if the full amount is not paid, you will be charged interest. The average interest rate on credit cards is about 19% – 29%.

In conclusion:

I am still conducting research on this and will probably do a follow-up to this blog in a month or two. However, I will say that I was pleasantly surprised how simple, upfront, and straightforward the process is.

I feel this could be something good for the person who needs to purchase something and can’t afford to wait. For example, you need winter boots in January and it’s not practical to save for two months (it will be almost Spring by that time) in order to buy it.

With these programs, you can purchase the item, use it, and pay over 2 months. If used properly I believe this could be a win-win situation.

Of course, the problem lies with the situation where a consumer is not able to control their purchasing habits and therefore this system can present an easy opportunity to over purchase and over consume. Which will in turn, lead to high consumer debt.

Like the saying goes: Know your limit and stay within it.