Life-changing LASIK surgery. Thousand-dollar concert tickets. Groceries, lipstick and bright pink sex toys.
These are just some of the things Canadians are buying with mini-loans.
Thanks to the rise of ‘buy now, pay later’ (BNPL), consumers can split all kinds of purchases into interest-free instalments by clicking a button — often without a credit check or only a soft credit check.
Today, BNPL lenders like Klarna, Sezzle, Afterpay and Affirm can be found at checkouts across the nation. They’ve partnered with popular retailers such as Ticketmaster, Sephora, Amazon and Costco, and have seen a big surge in users as a result, particularly among gen Z and millennials.
The share of Canadians who completed a purchase in-store or online using a BNPL service jumped to 25 per cent in 2024 from just nine per cent in 2022, according to Payments Canada, the organization that operates payment clearing and settlement infrastructure in the country.
And, by the end of 2030, the Canadian BNPL sector is expected to almost double its 2024 value of $6.69 billion (U.S.), to approximately $11.32 billion, Dublin-based firm Research and Markets projects.
Lenders say they are helping young Canadians, many of whom are just starting to build their credit scores, get access to smaller loans that are more manageable than traditional lines of credit.
“We’re credit on training wheels,” said Patrick Chan, general manager of Sezzle Canada.
But recent studies have found that BNPL increases spending and puts consumers at risk of losing control of their debt, with nearly half of American users reporting they’ve regretted financing at least one purchase with BNPL.
As the Canadian market evolves rapidly, there is growing concern around young people developing unhealthy spending habits with BNPL tools — especially as youth unemployment soars — while many are feeling pressure to keep up with pricey, unrealistic lifestyles promoted by sponsored digital influencers and social media.
People tend to see credit “as a tool that can enable that lifestyle,” said Miranda Goode, an associate professor of marketing at Ivey Business School who specializes in consumer behaviour and debt.
With rising costs of living, a lot of the things we want to buy today are not in our budgets, she added.
“That’s just the reality for a lot of people — you still want it and you’re still going to make (the purchase).”
‘It can get addictive’
Toronto resident Leeyhan Dizon, 40, remembers the first time he used a BNPL service. It was a few years ago, and he financed a coat costing around $500 (Canadian) from the trendy Canadian brand Moose Knuckles.
“I was a working student back then,” said Dizon, an employment development consultant at Brock University.
He was excited to make the purchase, he said, and even felt more motivated to work because he knew he needed the money to pay it off.
Then, a couple months later, he went on to get two pairs of winter boots with another loan, costing him about $400. Skin care and electronics purchases followed, and Dizon soon found himself losing control of his loans.
“I would try to recall, ‘why did I get this deduction or why did I get a debit of this amount?’ Then I would remember, ‘oh, yeah, it’s because I have a Klarna payment’ … And I would just be surprised.”
“It can get addictive, to be honest,” said Dizon. “Then you realize that you have spread yourself too thin on these items, or these purchases.”
The issue with BNPL boils down to human psychology, according to the Ivey Business School’s Goode.
Paying in instalments can make someone feel like they’re less financially restrained. “So therefore you make more frequent purchases using ‘buy now, pay later.’ And you usually spend a bit more,” she said.
“If I spent $50 at Sephora right out of pocket, right then and there, that would feel a lot worse than if I break it up a little bit,” she explained.
But at the end of the day, you’re still paying $50 — maybe more if you start missing payments.
Borrowing to buy food
While paying in instalments isn’t a new concept, more consumers have been gravitating toward “Pay in Four” loan offerings.
The way these loans typically work is, rather than paying the full amount upfront, the consumer pays a quarter of the value upon making the purchase. The remaining three equal payments then get charged to a credit card, debit card or bank account every two weeks afterwards.
Most BNPL lenders don’t charge any interest or fees on these loans if you pay on time, making them especially attractive to borrowers.
According to Payments Canada, young and middle-aged Canadians aged 18-34 and 35-54, respectively, are much more likely to frequently use BNPL than older Canadians.
But young Canadians appear to be relying more on these services to purchase necessities compared to middle-aged Canadians.
While young people say their top reason for using BNPL is the ability to easily borrow or defer payments, middle-aged Canadians are using it primarily to budget, according to Payments Canada data.
Young Canadians also included buying food and groceries among their top three BNPL purchase categories as opposed to middle-aged Canadians.
“The problem is, it’s hard to make enough money in this country to actually sustain your life,” said licensed insolvency trustee Joshua Harris of Harris & Partners.
“This is just the next generation of payday loans … baby boomers, they just go to Money Mart because they’re more comfortable with that.”
Harris said that, while he hasn’t come across borrowers defaulting on grocery payments, he’s increasingly seeing BNPL loans pop up in bankruptcy and consumer proposal filings. Often, the loans are on discretionary items, he added.
“It’s that sweatshirt you don’t need. It’s that gadget for the kitchen you definitely don’t need, and somehow people are getting stuck into this.”
BNPL lenders respond
The Star spoke with two BNPL lenders, Affirm and Sezzle, who maintained that they don’t benefit from customers overconsuming and falling behind on their payments. (Klarna did not respond to requests for comment and Afterpay declined to be interviewed for this story).
That’s because most of their revenue comes from charging merchants transaction fees, and not from late payment penalties.
“Because we have very minimal fees if you miss payments, the reality is, we can’t survive unless people actually pay us,” said Chan, Sezzle Canada’s general manager.
If someone misses an instalment, Sezzle will lock their account, stopping them for spending further until they make the payment as well as pay a “reactivation” fee of $10. Sezzle also charges a “rescheduling convenience fee” of up to $5 to allow users to delay their payment by up to two weeks.
Wayne Pommen, chief revenue officer for Affirm, said that while the company offers some loans that charge interest, it doesn’t collect late payment fees at all. “We take the full loss of not being able to collect the money that we sent the retailer on behalf of the consumer,” he said.
It’s difficult to know how prevalent late payments on these popular loans are, as different entities report varying statistics.
A study by American firm LendingTree found that 41 per cent of BNPL users reported paying late last year, up from 34 per cent the year before. However, 76 per cent of those people were late by only a week or so.
“I wouldn’t say that’s any more or less significant than what we’re seeing with credit card debt,” said Goode in response to LendingTree’s findings. “I think in the short term, those late payments are probably a little less impactful on people’s pocketbook than the interest that people are accumulating off of revolving debt.”
BNPL providers say the majority of their customers pay either on time or even early.
Afterpay states that 96 per cent of Canadian users are diligent borrowers. Meanwhile, Affirm reported in its latest earnings that the share of customers who missed a payment on a monthly instalment loan by 30 days or more was just 2.4 per cent.
Retailers win
Still, research supports that people spend more with BNPL, even compared to credit cards, with retailers seeing significantly higher sales and profitability.
A recent study published by the American National Bureau of Economic Research showed that BNPL increases sales by 20 per cent at checkout, driven by low-creditworthiness consumers — those who are least likely to repay their debt.
“It’s all about the incremental sale,” explained Dan Perlin, managing director of research in payments, processing and IT Services at RBC Capital Markets, in an article published by the bank in 2021.
“Retailers for years have complained about the cost of credit cards and the ultimate corresponding interchange fees that go along with that. The problem is that general-purpose cards are not driving another incremental sale at this point,” Perlin wrote.
“But BNPL shows upwards of 20 to 30 per cent lifts in incremental share at checkout. And average basket sizes are going up above those levels.”
Asked whether BNPL could be encouraging overconsumption in a way that isn’t putting consumers into dangerous levels of debt, but also might not be helping them spend responsibly either, Chan said it’s possible.
“Can Sezzle cause somebody to think that they should buy something that maybe they shouldn’t? Yeah, potentially,” he said.
“But I think people just need to be more, you know, mindful of how they spend.”
