Buy now, pay later apps have their benefits but can also be risky, say financial experts

Buy now, pay later apps like Klarna and Afterpay have grown in popularity since the COVID-19 pandemic, but experts warn people who use the services should be careful not to wrack up debt.

Kamran Eshghi, an associate professor at Laurentian University's School of Sports Administration in Sudbury, has studied buy now, pay later apps and says they are especially popular with young people.

"Usually the younger generations, they are the customers of the BNPL (buy now, pay later) providers because they do not have credit history," he said.

The services partner with retailers and allow their users to make purchases in small instalments over time at those stores.

Klarna, one of the most popular apps, has an option called Pay in 4 that allows users to make big purchases in four interest-free payments. 

Eshghi says buy now, pay later apps generally make money by charging merchant fees directly to retailers.

The retailers pay the fees because it benefits them to reach more customers and sell more expensive items that might have otherwise sat on a shelf.

But as with credit cards, late payments come with extra fees for the buyer.

On its website, Klarna says they charge a late fee of up to $7 per missed payment for the Pay in 4 service.

The company also offers a "pay over time" service where late fees and interest are outlined in individual credit agreements.

According to a recent survey by LendingTree, an online lending marketplace, nearly a quarter of consumers in the United States are using buy now, pay later services to buy groceries, up from 14 per cent last year.

Eshghi says not as many Canadians are using the apps to pay for necessities as in the U.S. One big reason is that many major retailers don't yet support the apps.

But he noted Walmart does partner with Klarna, and the online grocery shopping service InstaCart lets people pay in instalments.

John Cockburn, the financial empowerment co-ordinator with the Sudbury Community Service Centre, says many of his clients regularly use buy now, pay later apps.

"A lot of them use them without any trouble," he said.

"It's a way to buy or make large purchases that you can't afford now and pay them off over instalments, usually with zero interest."

But Cockburn says the apps are so easy to use that people can easily lose track of their purchases and get into debt.

"Very often what we're seeing in clients is that they're missing these $50 payments," he said.

"They forget the payment is going to come out on a certain day and the money's not there, or the credit card that they're going to take it off of is maxed out."

Cockburn says those missed payments, and the interest and fees that come with them, can easily snowball and bury people in debt.

"Statistically in Canada, if you're caught in one of these kinds of payday loans or buy now, pay later schemes, you're just as likely to be in two or three of them at the same time," he said.