Like many others during the COVID lockdown, I bought an exercise machine. I figured I could be productive and work out without having to put real pants on. It only took a couple of months to become a place to throw my clothes, which was impressive.
What was more impressive to me at the time was that I didn’t need to pay for it all at once. Instead, I was able to try out a payment plan while being able to have the item before it was paid off. What was this witchcraft? The Buy Now, Pay Later payment button.
What is Buy Now, Pay Later (BNPL)?
Buy Now, Pay Later (also known as BNPL or point-of-sale financing) are installment loans that allow you to break up paying for your shopping trips over an extended period of time. Typically, installment loans are used to purchase big-ticket items like a car. Still, with the rise of online shopping, retailers have recently capitalized on this financing method as an alternative payment method.
Depending on the retailer and the items you purchase, your payments can be spread out over a few weeks or months. The other perk besides being able to pay smaller amounts over time? Paying no interest, unlike what you would pay when using a credit card.
How Does It Work?
When you go to checkout for your purchase, you’ll be asked if you want to pay the total or smaller amounts via a BNPL option. After clicking, you’ll be automatically redirected to the BNPL platform the retailer has partnered with. You’ll be asked to fill out an application that includes your personal information and how you would like to pay back the installment loan. After a soft credit check, you’ll know within seconds if you’ve been approved. Since it’s not a typical installment loan, even those with bad credit can usually qualify.
BNPL companies include popular ones like Afterpay, Klarna, Affirm, and Sezzle. Because this payment method is gaining popularity, even payment platforms like PayPal are getting in on the action. While BNPL companies don’t make money off you as a consumer, they make money from the retailer you purchase from. Since you may be inspired to spend more money than you usually would when offered a payment plan, BNPL bet on this to make their money back.
You might think BNPL sounds like a great way to get some stuff off your shopping list. But there are also things you need to consider before you use buy now pay later this holiday shopping season:
1. You’re more likely to spend more than you can afford.
I love a good budget almost as much as they love yelling Dracarys in House of the Dragon.
In fact, I’m writing an entire book on budgeting that will be out next spring. One of the concepts I’m now most fascinated by is called “pain of paying.” Humans generally hate losing, especially when it comes to losing a resource like money. This is why we love buying stuff when it’s on sale and will most likely buy a cheaper option if given a choice. The more money we spend, the more pain it causes, because the more we lose. This is why you might feel sick when the cashier rings you up at Target (I digress).
One of the reasons BNPL is so tempting is that you’ll most likely pay a smaller amount every time. It hurts less. When it hurts less, we’re most likely to keep doing it. That includes using this payment method over and over. The problem is that when they are due, you might be unable to pay them properly or just forget, which can affect your cash flow.
2. The excess fees are scarier than the alien in Nope.
I mentioned earlier that 0% interest is one of the main perks when using BNPL as a payment option. Unlike credit cards, you’re not paying interest on items you will pay back. However, if you miss a payment to the BNPL company, they’ll hit you with a late payment penalty. It can be small, such as a few added dollars to the next payment.
But, it can also be added interest of sometimes up to 30%. If you’re late, Afterpay pauses your account until you’re caught up on payments and reassess you as a customer. Don’t think this will be you? It’s estimated that 43% of those who use these services have made a late payment.
Late payments can also affect your checking account. Payments to your BNPL will be charged automatically to a credit or debit card you have linked on file to pay back your loan. If your payment is missed because you have no money in your account, you can get hit with insufficient fund fees until it’s fixed.
3. BNPL may not help your credit, but it sure can hurt it.
Your credit score comprises five factors, including on-time payments and the number of open lines of credit you currently have. While credit bureaus want to factor BNPL accounts in, they haven’t figured out how to do it without reporting the number of accounts you open and close when taking out these loans. You see, every time you close an account, there is a chance you can affect your credit negatively. So, even if your BNPL loans are on time, it won’t positively impact your credit score, but it won’t affect it negatively either.
What will affect your credit is if you miss a payment. If you can’t catch up on missed payments, your account will be sent to a collection agency which will show up on your credit report. A ding on your credit can hurt your chances of getting financed for something you may need, like a new car later down the road.
4. BNPL also offers less buyer protection than a credit card would.
Just because you’re financing stuff like you would with a credit card doesn’t mean that BNPL has the same customer protection. The Fair Credit Act was passed in 1970 to help consumers like you and me avoid paying for fraudulent purchases. How? The Fair Credit Act enables us to get refunds from our financial institution immediately while having them fight the fraud charge on your behalf.
As of now, the Fair Credit Act does not apply to fraudulent purchases made with BNPL loans. You can report what happened to the company you financed with, but there is no guarantee you’ll get a refund or any other action toward your dispute. Like the credit bureaus, the government is trying to figure out how to apply this to BNPL, but they are still coming up short.
5. You can get more addicted to shopping than watching TikTok videos.
It’s easy to spend money you don’t have. It was estimated last year that the average consumer alone has $96,371 of debt to their name. You may not be in debt up to your eyeballs, but BNPL can be a gateway to joining the club, much like credit cards. Getting caught up in making purchases you don’t have to pay immediately is very easy.
What’s $10 here and $20 there? Probably nothing at the time you make the purchase. But eventually, everything adds up. Unless you’re keeping track somewhere, it’s easy for these loans to add up on top of each other to where you have to come up with hundreds of dollars every other week. It’s also easy to just keep financing future purchases. After all, you can’t pay for them because you’re too busy paying off your past.
Can you use BNPL safely?
In my humble opinion, you can use BNPL safely if you follow a simple rule. If you don’t have the money to purchase the item now, do you know how you can pay for it in the future? If you know off the top of your head what categories you can cut to make your new payment fit, go for it. BNPL can offer a 0% rate on purchases you can stretch out over a few weeks or months. This can help you spend less than putting stuff on a credit card.
At the end of the day, you know yourself and your spending habits. If your eyes get wide at not having to pay for a huge Sephora haul all at once, BNPL may not be a good fit for you. But If you’re pretty good at determining your wants versus needs, this alternative payment method can offer some wiggle room in your budget. Just try not to make it rain.
