Buy now, pay later: Understanding installment payments

02 February 2022 by National Bank
A woman is happy to have finally received the sweater she ordered on the internet and which she is paying for in equal installments.

Many stores are happy to let you walk out the door with an appliance you can start paying off in a year, in 12 equal installments. Online shops offer clothing you can purchase by putting some money down now and the rest later through regular payments over a few weeks. The “buy now, pay later” concept may be a good solution for you, but you should take certain precautions. Here’s how to make an informed decision.

What are installment payments?

This is a type of credit that some credit companies offer when you want to buy something from a merchant. A few years ago, you might have seen it offered as  “buy now, pay later” or a deferred payment plan. You could wait a set time after making your purchase before you had to start making payments on it. It was most common among appliance dealers and large furniture chains.

Now you see it almost everywhere—especially when buying clothing—and payments start right away. It’s not uncommon for companies big and small to give you the option of buying relatively inexpensive products online and stretching payments out over four or six weeks, for example.

The terms and conditions vary. Sometimes they give you one year to pay off your purchase in one lump sum. Other times, you may be asked to pay gradually in 12 interest-free monthly payments, or four small payments every two weeks. 

What are the benefits of interest-free payment plans?

It makes buying easier

If an emergency arises and you’re forced to make a big purchase you hadn’t planned for (say an oven, refrigerator or smartphone), paying in installments could make things easier. 

There is no interest to pay

With this type of payment plan, companies agree to sell you their goods on credit with no interest. One of the biggest advantages of this is that it lets you spread out your payments without paying any extra on the total price. Of course, you do have to meet the terms of the contract (i.e., installment amounts and dates) to avoid interest charges. 

It’s easy to budget

If you make a purchase over a fixed period of time, say 12 months, you’ll know in advance how much you’ll have to pay each month and can budget accordingly. However, be sure to do your calculations before accepting the installment agreement to make sure you’ll be able to afford the payments.

What are the limits of interest-free payment plans?

Watch out for penalties 

Few people take the time to read all the terms and conditions of a credit contract. For example, what fees or interest charges will apply if you forget or are unable to make a monthly payment? Penalties vary by agreement and vendor. Some credit providers may charge up to 30% interest—sometimes on the total purchase amount—for a missing payment. 

Debt can affect your credit score

Installment payment solutions are basically a form of financing. That means it’s a debt that may show up in your credit history, depending on the provider. Be careful not to fall into a cycle of debt that may be difficult to get out of, especially if you have other big payments to make. If you manage your payments well and keep your overall debt load at a reasonable level, there shouldn’t be a problem. That said, if you rack up too much debt or don’t pay on time, your credit score could drop.

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What other payment options should you consider?

Personal credit card or line of credit

Although you will have to pay interest, your personal credit card or line of credit may be a better option.

With your credit card or line of credit, if for some reason, you’re unable to pay your full balance, you can pay the minimum amount. This can buy you time to pay the full balance later when you have the funds available. Depending on the interest rate on your card or line of credit, you may end up paying less than with the penalties for late payment per installment.

As with other credit facilities, missing a payment can be costly and affect your credit score. 

Good to know: If you run into a problem, it will probably be easier to reach your financial institution than installment payment solution providers. These companies are often mostly digital, which can make it hard to get a real person on the phone. 

The main takeaway here is that an equal installment plan may be a good solution. But it’s important to take a careful look at your personal situation. Do you make enough to cover all your monthly expenses in addition to the installment payments on your new purchase?

Before you commit to an installment plan, take the time to read all the terms of the agreement to see what the penalties are for non-payment. Lastly, check to see if other payment methods might be more suitable for you.

Check out our dedicated page for more tips on managing your finances.

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