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People walk through Dufferin Mall in Toronto, on Oct. 27, 2021.Christopher Katsarov/The Globe and Mail

The first time Natalie Zidanic used a buy now, pay later option, she spread the cost of a $325 Aritzia jacket into four interest-free payments over two months.

The 26-year-old Toronto woman said she didn’t necessarily need to use the Afterpay service to cover the cost of her sister’s Christmas present.

“But the option to slash this large purchase into several more manageable payments was enticing because it gave me the agency to manage my cash flow, especially during the holidays when credit card bills typically add up quickly,” she said. “Using Afterpay let me pay my balance slower, without having to worry about interest.”

Ms. Zidanic is one of many young adults who have embraced the BNPL option, which targets millennials and Gen Z.

BNPL is simple and convenient: When checking out, shoppers fill out a short application and provide basic personal information, including a link to a debit or credit card. But while splitting the cost of a purchase into four no-interest payments sounds like a great deal, studies have shown the plans prompt shoppers to spend more than they otherwise would have.

Jessica Moorhouse, a millennial money expert, speaker and Accredited Financial Counselor Canada, said the biggest downside is the psychological aspect.

“The biggest thing I tell people is, ‘Don’t ever spend money that you don’t have.’ That’s what keeps people from paying down their debt and building wealth. These apps, although they’re convenient, do prevent you from living within your means.”

One U.S. study found that among shoppers who had used BNPL, almost 40 per cent had missed more than one payment. So what happens to shoppers who don’t pay on time? They face interest charges, late fees and suspended accounts. Adding to the confusion: Each company has its own rules, so make sure to read the fine print before signing on.

Instalment payments are not a new concept. From the days of layaway plans to the no-money-down promises on 1980s infomercials, there have long been opportunities for shoppers to pay for purchases in chunks over time.

But over the past 18 months, a slew of new fintech companies offering high-tech versions of this service have flooded the Canadian market.

Afterpay, which launched in Canada in August, 2020, has partnered with retailers that target Gen Z and millennials, including Aritzia, Lululemon, Urban Outfitters and Nars. Other BNPL companies, such as Klarna, PayBright and Sezzle, also operate here.

And many of the big banks, including Canadian Imperial Bank of Commerce, Royal Bank of Canada and Bank of Nova Scotia, are getting into the game, launching – or at least announcing – their own instalment payment programs.

According to Worldpay’s 2021 Global Payments Report, “BNPL has grown to account for 2.1 per cent of all global e-commerce transactions in 2020,” likely helped along by a spike in online shopping during the COVID-19 pandemic. E-commerce sales nearly doubled from May, 2019, to May, 2020, according to Statistics Canada.

BNPL plans target young adults who might not have much money, but are exposed to expensive lifestyles and consumer culture on social media, Ms. Moorhouse said.

“[They] want to be able to participate and feel like they’re part of that culture, although they may not have the finances to actually get all those things, and these buy now, pay later services give them an avenue to get there. It seems like it’s a solution, but this is really just a way for this company and retailers to get your money sooner.”

Like credit card companies, BNPL apps loan users money for short terms. But there are differences: Credit card companies will charge you interest on your balance if it’s not paid off by the monthly due date, while some BNPL lenders will instead charge late fees if a payment is not made within seven days of a scheduled instalment.

BNPL lenders generally don’t run credit checks before approving customers’ accounts, but they may report cases of late or missed payments, which can adversely affect a customer’s credit score.

Most notably, unlike a credit card, shoppers cannot use BNPL to build a good credit score by using it responsibly.

Experts agree that the best way to use BNPL – and all debt really – is to pay what you owe on time. Ms. Zidanic said using it has made her a more responsible shopper. “Purchases can definitely seem more affordable in the moment – charging $75 to your credit card is less of a blow than $300 all at once, for example – but it has never encouraged me to spend more,” she said.

“In fact, the opposite happens. Knowing over a six-week period that I’m going to be charged four times helps me budget with purchases of all kinds (groceries, restaurants, etc.). Seeing the instalment payments and the payment schedule definitely hits differently,” Ms. Zidanic said.

But for shoppers who frequently cave in to the impulse buy, BNPL apps can make it harder to stick to a budget.

“Anytime you take on consumer debt like this, you should really make sure that you have the money available to actually pay for it,” said Stephanie Douglas, a Toronto-based certified financial planner. “And if you’re buying multiple things using these [apps], it can get a little bit more complicated.”

To protect yourself, Ms. Douglas recommends reading the entire contract you sign with the BNPL lender to make sure you understand how they will handle returns, not to mention fraud, and what the repercussions are for missing a payment, both for your account and your credit score.

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