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FINANCIALLY AESTHETIC · GUIDE 16/37
BNPL, PAYDAY LOANS & OVERDRAFT TRAPS
FA-3.3 · Debt & Borrowing
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THE COST QUESTION
Small, convenient borrowing can stack into a cash-flow problem faster than a traditional loan.
“Buy Now, Pay Later” Plans
Many companies offer “Buy Now, Pay Later” plans for purchasing products and services. With this type of plan, you finance your purchase as a credit purchase.
You can buy something you need without having to pay for it in full right away. You spread out the payments over a period that fits your budget.
These plans go by other names. They include:
- installment payment plans
- purchase financing plans
- installment loans
- credit card payment plans
- merchant credit services
There are various payment options, but they all allow you to pay later.
Companies may offer a promotional rate for purchases made with a “Buy Now, Pay Later” plan. This rate can be as low as 0% interest. However, if you don’t make your payments on time, you’ll usually have to pay fees.
Some companies charge an administration fee to set up the plan. Generally, you pay this fee at the time of purchase.
Make sure you fully understand the terms of your plan.
How These Plans Work
A “Buy Now, Pay Later” plan generally includes the following agreements:
- an agreement with the merchant for the purchase of a product or service
- an agreement with a provider of financial services to finance a purchase
Your agreement with a provider of financial services usually specifies:
- the purchase amount
- the amount of each payment
- the frequency of payments
- the number of payments
- the interest rate
- fees
- the payment plan
Ask the merchant or provider of financial services to explain anything you don’t understand.
There are two main types of plans. With an equal payment plan, you make regular payments. Providers of financial services and merchants also call these “installment payments.” The terms of your agreement specify the minimum amount you must pay and how often. You make payments until you’ve repaid the entire balance.
With a deferred payment plan, you must repay the balance you owe by the due date at the latest. There is no specific amount for the payments. You manage your own payment plan.
Payment Models and Their Hidden Risks
When you sign up for a “Buy Now, Pay Later” plan, you’re financing your purchase on credit. The provider of financial services may run a credit check before approving your application.
With a pre-authorized debit payment plan, the provider of financial services automatically withdraws regular, equal payments from your bank account. Usually, your first payment is due on the date of purchase. If you do not have sufficient funds in your account to cover the payment, you may have to pay fees. These may include a missed payment fee charged by the provider of financial services and a non-sufficient funds fee charged by your financial institution.
With preauthorized credit card transactions, your provider of financial services automatically debits regular, equal payments from your credit card. Some providers of financial services charge a processing fee for each payment. This adds to the cost of your initial purchase. It is your responsibility to pay your credit card bill on time. Some credit card providers do not allow “Buy Now, Pay Later” transactions and may block your transaction.
Some credit card providers offer a built-in card feature, sometimes called “equal installments.” You may be able to have multiple “Buy Now, Pay Later” plans on your credit card. The merchant charges the total amount of your purchase to your credit card, and then your provider converts your purchase into an equal-installment payment plan.
Some merchants offer merchant credit cards with a “Buy Now, Pay Later” option. If you miss a payment, you could lose your promotional interest rate. This also happens if you don’t pay off the entire balance by the due date. For example, the interest rate could jump from 0% to 35% if you miss the due date for the minimum payment. You’ll have to pay a higher interest rate until you’ve paid off the entire balance. This could be costly. Depending on the terms of your plan, a late payment means you’ll pay interest on the total amount from the date of purchase, or on the outstanding balance.
Finally, a merchant may offer to finance your purchase with a personal loan. You borrow a fixed amount of money and agree to repay it over a set period, including interest and applicable charges.
Before You Commit: Pros, Cons, and Red Flags
Before signing up for a “Buy Now, Pay Later” plan, consider the following:
- Make sure you really need the item you plan to buy
- Make sure you have the discipline to repay the balance by the due date at the latest
- Determine whether you can afford the higher interest charges and any applicable charges if you miss a payment or are unable to repay the balance by the due date
Advantages:
- You can buy something you need and spread out the payments over a period that fits your budget.
- You can benefit from a low-interest rate or a 0% rate if you make your payments on time and repay your balance before the due date.
Disadvantages - Warning Signs of Compounding Debt:
- It can be an expensive way to borrow money if you miss a payment.
- Fees may apply, which means you could end up paying more than the retail price of your purchase.
- You need to be disciplined to make your payments on time.
- It can lead to excessive debt if you take on debt you can’t afford or that doesn’t fit your budget.
- You could put your credit at risk.
- You might misjudge the actual or total cost of your purchase.
- This could lead you to spend beyond your means or make impulse purchases.
If you have a complaint about your “Buy Now, Pay Later” plan, contact the plan provider. Depending on your agreement, you may also need to contact the merchant.
The French Context: Installment Payments and Small Short-Term Loans
The digital transformation of the credit sector has led to the emergence of new forms of consumer financing: installment payment plans, deferred payments, and small short-term loans. With a quick and seamless sign-up process, the enthusiasm among young consumers (ages 18 - 24) is palpable. However, no changes should be made at the expense of ensuring that operators’ practices comply with consumer protection rules.
The DGCCRF conducted inspections of 258 businesses in 2021 and 2022, targeting specialized credit institutions, their intermediaries - including fintechs offering these new financing options - as well as merchants offering installment payments. Thirty-six of the 258 businesses inspected were found to be non-compliant.
A statistic on the number of BNPL plans a person has open is not necessary to understand how the system works: the body of research already documents the possibility of having multiple plans and the fees or interest that can accumulate when payments are mismanaged.
Payday Loans
Beware of Unlicensed Lenders
Before taking out a payday loan, make sure you’re dealing with a licensed payday lender. Contact your province or territory’s consumer information office for information on licensed payday lenders.
What Is a Payday Loan
A payday loan is a short-term loan with high fees. It is an expensive way to borrow money. This type of loan is also known as a high-cost loan or high-cost credit. You can borrow up to $1,500 and have up to 62 days to repay it.
Payday loans differ from other traditional loans because:
- You can only get them for a short period of time, usually a few weeks
- you may qualify without a credit check
- you pay fees instead of interest when you make payments on time
- the lender schedules your loan payments around your pay schedule
You’ll need to repay part or all of the loan when you receive your next paycheck. If you don’t pay on time, you’ll pay additional fees and interest. This will increase your debt.
Less Expensive Options Before Turning to This
Make sure you’ll be able to repay the loan on time and cover your regular expenses.
If you’re facing a financial emergency, you might consider:
- asking for more time to make payments on your bills
- cashing out vacation days
- asking your employer for a salary advance
- obtain a loan from family or friends
You may also want to consider other options that are less expensive than a payday loan, such as:
- taking out a loan or line of credit from your financial institution
- getting a cash advance on a credit card
- using the overdraft protection on your checking account
- Asking your lenders for payment deferrals. This may include a mortgage deferral and a payment holiday on your credit card
For a $300 loan with a 14-day term, the cost comparison is revealing:
| Loan Type | Cost |
| Line of credit | $5.92 |
| Checking account overdraft protection | $7.42 |
| Credit card cash advance | $7.65 |
| Payday loan | $42.00 |
The assumptions in this example are: you borrow $300 for 14 days; a payday loan costs $14 per $100 borrowed, which represents an annual interest rate of approximately 365%; a line of credit includes a $5 administration fee and an annual interest rate of 8%; overdraft protection for a checking account includes a $5 fee and an annual interest rate of 21%; a credit card cash advance includes a $5 fee and an annual interest rate of 23%.
Where and how these loans are extended
Private companies offer payday loans in stores and online. They must follow the rules established by the province or territory where they do business. Each province sets its own rules regarding payday loans. The territories do not have specific rules. Payday lenders must be licensed to issue payday loans in your province or territory. Be wary of online payday lenders located outside Canada. If you have problems with them, it may be difficult to resolve the issue.
Generally, payday lenders will require proof that you have a steady income, a bank account, and a permanent address. Before extending a payday loan to you, lenders may require you to fill out a pre-authorized debit agreement, allowing the lender to withdraw payments - including fees - directly from your bank account, or to provide a postdated check for the total amount of the loan, including fees.
In most cases, the payday lender will deposit money into your bank account or give you cash. In some cases, the payday lender may give you a prepaid card, also known as a payment card. Activating and using the card may incur surcharges.
Payday Loan Rollovers: What the Law Says
Some payday lenders require you to repay your loan at the same location where you obtained it. In most provinces, a payday lender cannot extend or renew your payday loan. This generally means they cannot push back the due date and charge you new fees. If you cannot repay on time, they may charge you interest.
Provincial laws prevent payday lenders from asking you to sign a form authorizing them to have your salary deposited directly into their account.
The payday lender will ask you to sign an agreement. Each province has rules about what must be included in the agreement, which generally includes the amount borrowed, fees, the payment schedule, and the loan’s due date. Read your agreement carefully before signing it.
The True Cost and the Debt Cycle
Payday loans are very expensive compared to other ways of borrowing money. The reasons are as follows: you pay high fees, you may have to pay additional fees if your check or pre-authorized debit fails, and you may have to pay interest if you do not repay the loan on time. These costs could make it harder to repay your loan. This can cause or increase financial distress and stress.
Several provinces regulate the fees and penalties associated with payday loans: Alberta, British Columbia, Prince Edward Island, Manitoba, New Brunswick, Nova Scotia, Ontario, Saskatchewan, and Newfoundland and Labrador. In provinces where payday loans are regulated, the maximum cost of borrowing is $14 for every $100 you borrow, and the payday lender may charge a one-time fee of $20 for a bounced cheque. In other provinces and territories, the maximum cost of borrowing is capped at the usurious interest rate of 35%.
You could face serious consequences if you do not make your payments on time. Depending on your province’s laws, these consequences may include the following:
- If you do not have enough money in your bank account to cover your preauthorized payday loan payment, the payday lender may charge you a fee, and your financial institution may charge a fee for insufficient funds.
- The payday lender may charge you interest on the missed payments.
- The total amount you owe, including fees, may continue to increase.
- The lender may hire a collection agency, and this may appear on your credit report.
- The payday lender or collection agency may sue you for the debt.
If you don’t repay your loan on time, you risk getting stuck in a cycle of debt.
Here’s a real-life example: You need $300 for home repairs. You take out a $300 payday loan for 2 weeks. Over the 2-week period, you’ll pay $42 in fees. This equates to an annual interest rate of 365%. You owe $342. If you miss a payment, you’ll pay a $20 late fee. You now owe $362.
You may face financial distress because you cannot pay your debts. Carefully consider the long-term consequences of payday loans. Seek advice from reliable sources to explore the various financial options available to you. Qualified professionals can help you find the best solution for your financial needs. Their advice is confidential, non-judgmental, and often free. Some options include a financial advisor, a certified credit counsellor, a licensed insolvency trustee, or a lawyer specializing in insolvency.
Bank Overdrafts: Credit in Disguise
Following an unexpected event, an exceptional expense, or an oversight, you may find yourself “overdrawn.” Your account balance then becomes negative. Since an overdraft is a line of credit extended by your bank, the bank is authorized to charge you interest and fees, more commonly known as overdraft charges.
Authorized or Tolerated Overdraft
Either you have an authorized overdraft. In this case, your account agreement specifies the amount, duration, and repayment terms. Or it is a (non-automatic) tolerance granted by your bank, even if you do not have an authorized overdraft. You can request a one-time authorization at a branch or by sending a letter to your bank.
Extended Overdraft: A Bank’s Obligation
When your overdraft lasts longer than 3 months, your bank must either demand immediate repayment of the overdraft or offer you credit, valid for 30 days.
Credit Is Never Free
An overdraft, even an authorized one, is still a loan and is not free. In exchange for this loan, you pay interest charges (overdraft fees) calculated based on the number of days the account is overdrawn, the amount of the overdraft, and the bank’s annual interest rate. In addition to these fees, the bank may charge you for account irregularities or payment incidents.
There is a way to limit the bank fees associated with exceeding an authorized overdraft limit: you can reduce the risk of going over your limit by following certain tips. There is also a cap on bank fees, which you may be eligible for if your financial situation warrants it.
Key Points for Comparing the Three Mechanisms
These three forms of everyday credit are based on distinct business models. The “Buy Now, Pay Later” plan finances a specific purchase from a merchant, with a separate provider of financial services that may perform a credit check before approving the application. A payday loan is a high-cost loan tied to the borrower’s pay schedule, capped at $1,500 and 62 days, and governed by provincial regulations that, in most cases, explicitly prohibit the lender from extending or renewing the loan. An overdraft, on the other hand, is part of an existing account agreement with the bank: it is a credit that is triggered by a negative balance - with or without prior authorization - and which the bank is required to settle after three months of continuous overdraft.
In all three cases, the common warning sign remains the same: fees or interest that accumulate when repayment is not made on time, turning a one-time financial lifeline into a debt that continues to grow.
BEFORE YOU SIGN
List every due date and fee in one place; if repayment needs another short-term loan, the structure is failing.
CURRENT-RULES CHECK
Legal protections, tax rates, reporting duties, deadlines and product rules change by country and over time. Use the jurisdiction labels in this guide and check the linked official source before acting.
- CFPB - Should you buy now and pay later? - United States - BNPL consumer risks.
- CFPB - Do BNPL loans have fees? - United States - BNPL fees.
- CFPB - Consumer experiences with overdraft programs - United States - overdraft evidence.
