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Angelica Carolino is ready to start shopping for the holidays – because she’s not going to pay for it all up front.

As inflationary pressures weigh on consumers, the Toronto-based international student and mother of three is one of many turning to buy now, pay later (BNPL) services this gift-giving season.

There’s been an increase in activity in the BNPL space over the past year, said Payments Canada in its 2022 trend report, including vendor partnerships between tech companies and established BNPL firms, as well as the entrance of global payments providers, banks and other competitors.

BNPL splits up a purchase into several equal payments, with the first payment typically due right away. Many of these services don’t charge interest or fees unless a customer is late in paying.

What you might not know about buy now, pay later plans

Carolino said the service has been invaluable for her household, as she and her husband have relied on it for big expenses such as back-to-school shopping.

While aware of the risks that come with BNPL, Carolino maps out the instalments carefully, avoids using the service for unnecessary purchases and knows that if she isn’t careful the debt could snowball into an unmanageable sum.

“You really have to be mindful and conscious and really aware of what you can spend,” said Carolino, noting the rising cost of living has made her more likely to use BNPL.

You can use BNPL services on a variety of purchases: your Sephora haul, a new phone from Samsung, a mail-order mattress from Endy.

BNPL providers, such as Afterpay or PayBright, partner with merchants to offer their services at physical and online checkouts.

It’s not just third-party companies offering BNPL, either. Payments companies like Visa are also jumping in, and many of the major banks have started offering payment plan options in the past few years – though these usually involve some kind of fee, they’re much lower than typical credit card rates.

BNPL can be useful for consumers who don’t have access to traditional credit, or who want to spread a major purchase over time, the Payments Canada report found.

It said BNPL benefits businesses too, since customers are more likely to finalize their purchase or buy more items at once.

Personal finance expert Jessica Moorhouse said she’s concerned BNPL is detrimental to consumers, especially this year.

“In 2021 it was one thing ... the stock market was doing well, everyone had extra money to blow,” said Moorhouse. “Now we’re in this kind of opposite situation where the market is down, there’s really high interest rates, inflation is incredibly high, and people are talking about a recession.”

No fees and no interest if you pay on time might sound like a piece of cake, but experts say even if you don’t miss a payment, you could end up paying extra in other ways.

For example, you might use your credit card to pay BNPL instalments, which will accrue interest if you carry a balance. In fact, a pilot study by the Financial Consumer Agency of Canada found that 42 per cent of BNPL users were using their credit card to pay instalments.

Even if the payments come from your chequing account, you’re not necessarily in the clear. The FCAC study found that of those surveyed who had paid off a BNPL purchase in full, 15 per cent had to make negative financial trade-offs to do so.

That included incurring overdraft charges on their chequing account, delaying payment of another bill, or otherwise incurring debt.

Jackie Porter, a certified financial planner, said BNPL draws shoppers in by providing instant gratification, but can be a slippery slope.

“Once the payments start hitting and the cost of living is going up ... it could wreak havoc on your financial circumstances.”

During the holidays, “the temptation is real” to spend beyond your limits, said Porter, but it’s important to think about the financial hangover you could be setting yourself up for, especially as the cost of living rises into 2023.

Moorhouse said Carolino’s organization and foresight when it comes to using BNPL is likely rare, and that most people have a much harder time budgeting.

If you are going to use BNPL, Porter said you have to be disciplined, and be real with yourself about your financial habits. Start putting the money away now so you’re sure you can pay later, she said, and avoid making multiple purchases with BNPL or you could lose track.

Experts also recommend using debit, not credit, to pay your instalments.

Otherwise, “It’s just like kicking the ball down the road,” said Laurie Campbell, director of financial wellness at Bromwich+Smith.

It’s important that you read the fine print before using BNPL, she said. There are so many companies offering BNPL, and they’re all slightly different, but one thing is the same – if you’re not careful, you could be on the hook for a lot of money.

“You’re hijacking your future income for something that you want today. And that is always dangerous if you really can’t afford it today.”

And if an emergency cost arises that necessitates the use of BNPL, Moorhouse said you should take that as a sign that you need to start saving for future emergencies.

“A short-term loan is not a solution for a long-term problem,” she said.

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