Buy now, pay later plans and the rise of consumer debt

A rising number of Canadian retailers are offering consumers financing plans for goods such as laptops, jewelry and clothing – and this trend is putting more people in debt.

These services can take many forms. The Brick and Best Buy both offer financing plans only when a consumer signs up and activates his or her store credit card. Once approved, minimum payments and interest must be paid monthly.

Apple and Ikea offer “interest free” financing options, however if minimum payments are not made, a 20 to 26 per cent rate of interest incurs on the unpaid amount. On top of high rates of interest, there are usually fees associated with using these services, including application fees and monthly account costs.

As the number of retailers with financing services increase, so are Canadian consumer debt levels.


Credit monitoring firm, TransUnion, reports that the average Canadian’s consumer debt load hit $27,485 at the end of last year, a six per cent increase from 2011.

The research discovered that all forms of consumer debt increased, however two areas in particular are on the rise: car loans and “installment loan borrower debt” – loans taken out to buy goods such as electronics, home furnishings, jewelry and other pricy consumer items.

Nowa factor in the rising level of Canadian debt, installment loan debt increased 6.71 per cent between 2011 and 2012.

More Canadians are taking advantage of these buy now, pay later services, especially students.

A recent Carleton University graduate, who wishes to remain unnamed, decided to pursue a master’s degree at The University of Sydney in Australia this past February. After paying for travel, tuition, books and accommodation, the young woman realized she was short the funds for a new laptop.

Despite the lack of money, she bought a brand new MacBook Pro at Best Buy and signed up for the store’s credit card to take advantage of their financing services.


“The option I chose worked well for me because of a cash flow issue, I needed money for tuition,” she explains.

She says she purchased the laptop on a deferred payment plan. “It is required that I make minimum monthly payments, which end up being 10 dollars a month.”

Signing up for a 12 month financing plan, she says as long as she makes her minimum monthly payments in time, she will not be charged interest. However, if in the future she misses a payment, interest will accrue on the financed amount at 29.9 per cent, a rate much higher than any credit card interest rate.

Finally, just for signing up for the financing plan cost her $70 which she had to pay upfront as a fee.

Despite the fees and risk of a high interest rate, she admits that if she is in the same financial situation in the future, she won’t hesitate to take advantage of other buy now, pay later plans. “There’s a convenience of not paying right away.”

Financing plans that are perceived as convenient and easy to acquire is a trend that worries Kristan Birchard, a financial advisor in Ottawa and member of the Financial Advisors Association of Canada.


Birchard think Canadians should be better educated about financing plans in order to make better buying decisions.

“Common sense should prevail, I think it is well understood by most people that there is no such thing as a free lunch,” says Birchard.

If an opportunity seems too good to be true, he says it probably is. “If there appears to be an opportunity to not pay for a certain period of time, you need to do a bit of research.”

According to Birchard, that research isn’t hard to do. “The key for people, when looking at these services, is to ask ‘what are my actual costs?’” He stresses that in order to make informed decisions, consumers need to ask questions and compare how much an item would cost if paid in full with cash and how much the same item would cost on a financing plan.

After factoring in high interest rates and other fees, Birchard believes that although financing services appear to be convenient, consumers will always pay more in the long run. “You are always better to pay with cash,” he advises.

Birchard also stresses the importance of budgeting. “If people were to work from a budget…they would know what they can handle and where they stand financially…a lot of people just don’t take the time to do a budget until they get into debt.”

The next time you come across a financing service that seems too good to be true, Birchard says to stick to three golden rules in order to make an informed decision: ask questions, do your homework and stick to a budget.