Millions of American buyers use the “buy now, pay later” payment options – and thus expose themselves to financial risk.
In fact, nearly half of all U.S. consumers have made a purchase with a Buy It Now, Pay Later option, according to a recent CreditKarma study. Of these, more than a third fell behind on one or more payments.
These alternative payment plans from fintech startups – which allow you to pay for your purchase over time, usually without interest – have exploded in popularity over the past year. Buy now, pay later, services grew 215% year over year in the first two months of 2021, a Adobe Analysis suggests. Retailers large and small are using installment plans to increase sales, from Amazon and Walmart to local stores. And with holiday shopping is already in full swing for many you may be considering them to help offset the costs this season.
Buy Now, Pay Later (BNPL) services promise convenience and an alternative to credit with no interest or surprise fees. And unlike the layaway options, you’ll receive your purchase in advance, instead of having to wait for it to be paid in full.
It’s all about instant gratification, says Carrie Rattle, a financial therapist in New York City who specializes in over-buying. “When the losses are pushed back for weeks or months, they seem less. It is [a] perception of greater affordability which is not reality.
Here’s what you need to know about buy now, pay later – and why you should exercise caution before using these alternative payment plans.
How does Buy Now, Pay Later work?
When you choose to buy now, pay later – also known as a point-of-sale installment loan – you agree to the terms of a payment plan when you make a purchase, and then pay it off over time. on a weekly, bi-weekly, or monthly basis. In most cases, the purchase must be greater than a certain amount to be eligible.
BNPL online options usually appear on the payment page on a participating retailer’s website. If you shop in person at a participating retailer, you will likely need to download an app to register. Some of the more popular BNPL providers include Affirm, Afterpay, Zip (formerly known as Quadpay), PayPal’s “Pay in 4”, and Sezzle.
We reached out to each of the above companies for more information on the potential risks faced by customers who might use BNPL to make purchases they cannot afford. Most companies did not respond before posting, although a spokesperson for Sezzle said its users are gradually able to use BNPL for larger purchases, depending on individual reimbursement performance over the years. time. A spokesperson for Affirm said he only approves customers for what he thinks he can “comfortably afford to pay back.”
“This is not a new concept”, says Jon schlossberg, co-founder and CEO of financial wellness tech startup Even. It’s a tactic retailers use to encourage customers to spend more, he says. “In order to get people to buy more things, a seller will offer a merchant the option of allowing customers to pay in installments for a very low interest rate or in some cases interest free.”
Payment plans vary by company, but often consist of four installments, with each payment covering 25% of the total transaction, including taxes. You must pay the first installment when you checkout, and the remaining installments are due every two weeks thereafter.
For example, if you make a purchase of $ 100, you could pay $ 25 at checkout, then pay three more installments of $ 25 over a six-week period. Each payment can be automatically debited from the debit or credit card you used to make your purchase.
Risks of buying now, paying later
If you are easily tried to spend too much, make impulse purchases, or if you don’t keep track of your finances, BNPL can make it easier for you to buy things you can’t afford. Studies have shown that when consumers pay in installments, they usually spend more.
“The more you buy now, pay later, the more you risk getting into debt,” says Rattle. She says the instant gratification of the purchase can easily overshadow your commitment to the plan’s terms and risk interest or fees when you miss payments.
And while many plans don’t charge interest on purchases – just late fees if you don’t pay on time – that’s not always guaranteed, either. Affirm is one of the few platforms that does not charge late fees, and it offers interest-free financing options, but depending on the retailer and the amount of purchase, may charge up to 30% interest. Depending on the BNPL platform, fees can range from a few dollars to over 25% of the transaction. Some apps even charge users a fee each time you use a plan. Zip, for example, charges a $ 1 fee per payment on your installment plan.
Data from CreditKarma also shows that younger generations are more likely to miss payments. More than half of Gen Z and Millennials who used BNPL report missing at least one payment, compared to 22% of Gen Xers and just 10% of Baby Boomers.
“People don’t plan far enough in advance for the reality of having to pay for this thing, so they end up falling behind in their payments and that ends up affecting their credit score,” says Schlossberg.
Can buying now, paying later affect your credit?
Much like credit cards or personal loans, BNPL installment plans are borrowed money that you will have to pay back within the time you agree to advance. And if you don’t, you might be charged a fee and your credit score might even take a hit.
The biggest difference is that BNPL plans don’t require a thorough investigation of your credit to see if you qualify. But these companies also do not offer the same consumer protection as a traditional lender or credit card issuer, such as dispute resolution or fraud guarantees.
While there is usually no serious investigation of your credit score when you sign up for a plan, some companies report late or missed payments to the credit bureaus, just like regular loans. According to Affirmer website, the company “may report your payment history to Experian” and “may report loans with overdue payments which may impact your credit.”
Benefits of buying now, paying later
Despite the potential costs, BNPL is an attractive option, especially when shopping online or purchasing expensive items.
It basically removes any barrier that discourages customers from clicking the “buy” button, and the data suggests many are drawn to platforms for their convenience. The most popular purchases along with buy now pay later are home and furniture, electronics and clothing, according to the Credit Karma study.
If you know you will have the cash on hand to pay off your installment plan on time and in full, BNPL can be an effective way to spread your payments over time. It is a concept similar to 0% introductory APR credit card offers, which can be an even better option for spreading payments over purchases, as you can earn points on your purchases and benefit from additional protections for consumers, such as extended warranties. But for either payment option to work, it’s imperative that you have a plan and the means to pay it off in full and on time.
“It can help someone if they know how to manage their money,” says Rattle. “If you track your finances and know you can do it, that’s great because you can get the items you really need and you can manage your payments. “
3 things to do before signing up to buy now, pay later
Review your budget
Because BNPL is still a form of debt, you need to be realistic about what you can afford.
“When you live from paycheck to paycheck, like one in three Americans isit is very difficult to make consistent payments on top of the bills you already have and the high cost of living that exists today, ”Schlossberg explains.
BNPL can be useful if you can afford to do your entire purchase, but paying in installments would help you manage your cash flow better. Before registering, review your budget to make sure you can afford the payments during the suggested period as well as your other financial obligations.
Make a repayment plan
Whenever you incur debt, it’s important to establish a repayment strategy. BNPL’s repayment schedules vary from company to company, but many are often bi-weekly or monthly. To avoid missing a payment, have a clear understanding of your due dates and what you’ll owe with each payment before signing up. Include your payments in your monthly budget for tracking purposes until it is paid off.
Review the fine print
Know what you agree to before you buy. The terms of BNPL services, such as fees and interest, may not be transparent at checkout, so take the time to dig a little deeper and read the fine print before signing up.
A clear understanding of any charges or interest you might incur for using the service will help you avoid any unexpected costs down the road. “You always want to do your homework,” says Rattle.
Buy-now and pay-on plans can be an effective way to spread the cost of a large purchase over time, but they also make it easier to buy items on impulse that you can’t actually afford.
Before signing up, review your budget, the exact costs involved, and set up a reimbursement strategy. This way, you can better secure your ability to repay the loan on time and avoid interest charges, late fees, or any negative effects on credit.
“It’s a flexible tool,” says Rattle, “but if you didn’t know you can afford it and you’re not careful and doing your homework first, I wouldn’t go near it. ‘them. “