Risk Free, Buy Now Pay Later? Think Again

With convenience comes unexpected costs

Over the past few years, Buy Now Pay Later or BPNL has become an increasingly popular option to make payments at retailers. BNPL spreads your payments over time, in weekly to monthly increments until the purchase is paid off. Typically these plans are interest free.

BPNL payment schemes are offered both online and in store by nearly every retailer at this point; Amazon, Apple, Walmart, Best Buy...etc.

Apple requires no down payment for its new iPhones where many BNPL plans would require 25% to purchase price with the remainder made in equal payments over six weeks or two years.

Rather than managing payments on their own, retailers rely on BNPL fintech companies like Affirm and Klarna. Amex and Paypal also offer BNPL for their customers.

According to Lending Tree, about one in three shoppers have used BNPL to make a purchase online. Nearly two thirds of these shoppers had used BNPL five times or more and 80% of these shoppers said they would continue using BNPL.

“Those are remarkable numbers for a relatively new product. Consumers love it, and it’s likely here to stay,” says Matt Schulz, chief industry analyst at Lending Tree.

Although convenient being able to delay payments, there are risks associated with using BNPL.Credit Karma recently published a study stating that over one in three consumers who used BNPL fell behind on their payments. Younger shoppers in this category were most likely to miss payments and over half of Gen Z and millennials missed payments vs. one in four gen X and one in ten baby boomers.

Although many options are interest free,late payments result in fees and other consequences. According to Credit Karma, 72% of shoppers who missed a payment felt it negatively affected their credit score. A third of that group saw significant declines in their credit score.

From charging late fees or reporting you to credit bureaus, each BNPL provider will have its own missed/late payment terms.

Consumers don't always understand what they are getting into. Before opting for a BNPLplan consider the following:

Look at your monthly spending prior to purchase

Ask yourself, can you afford the extra $100 a month for the next three months? Can you afford more than that if you miss a payment? Take some time to look at your spending over the last year and consider how this may affect your budget moving forward. Make sure you have money aside for when your bills come in. In addition to the risk of late fees you may be charged an overdraft fee if automatic payments are set up and you have insufficient funds.

Read the terms / FAQs carefully

Some services have fees and interest, some do not. Not all BNPL services are the same – make sure you read the fine print. These terms are usually spelled out on the FAQ page or customer support. If you cannot get a clear answer, email or call them to get the facts straight before going into a BNPL scheme.

Use automatic payments

Setting up automatic payments with your bank is one of the best ways to avoid a headache. This can typically be done online, doesn't take long to set up, and helps you avoid paying significant late fees or destroying your credit score.

Use a credit card instead

In the long run, you’re better off using a credit card – as long as you can pay your balance on time. “By using a credit card, you can build a good credit score, which is important for your overall finances,” says Matt Schulz, chief industry analyst at Lending Tree.

Credit cards also protect their customers from charge disputes, and offer purchase protection and other forms of insurance should your goods be stolen or damaged.

Of the many options credit cards are the safest option and should keep your costs lower over time vs. getting caught in late fees or credit score penalties.