The “buy now, pay later” pitch is appealing.
Why wait to save for what you want? That’s outdated thinking and old-fashioned financial advice.
Even major credit card companies have now adopted the buy now, pay later (BNPL) fixed payment model, made popular by companies like Affirm and Klarna.
Forget delayed gratification. BNPL is the modern layaway plan in reverse. Instead of waiting to take home an appliance, clothes or jewelry after you’ve paid for it over time, consumers get the purchase right away and split the future payments, typically into four interest-free installments.
These payment plans have become a way for millions of Americans to get by financially, with an increasing number of consumers using it for their holiday shopping.Adobe Analytics forecasts $20.2 billion will be spent via BNPL this holiday season, an 11 percent increase from last year.
If compared with piling debt on a credit card with a double-digit interest rate, a BNPL product seems like a better short-term solution for a cash-strapped consumer.
Yet BNPL deals can be a debt trap, too. This shopping strategy is designed to make you feel comfortable spending money you don’t have. And I’m particularly concerned that younger adults — who may not have a long credit history and therefore have more difficulty being approved for a general-purpose credit card — are more likely to use BNPL.
With the push to use BNPL particularly aggressive during the holidays, here are five hidden dangers that can make this payment option a bust for your budget.
The illusion of affordability
Breaking up payments into smaller parts might seem like you’re being financially responsible. But pause and question the long-term consequences of this convenience, especially if you’re doing it to purchase a gift.
BNPL can raise the spending limits you had set for yourself. In turn, overspendingcan leave you with less money than you need for essential expenses later.
According to a Bankrate survey, nearly half of BNPL users have experienced at least one financial problem with these services, with overspending being the most common.
A spiral of debt
BNPL plans are so widespread that it can be easy to find yourself managing multiple payments for various companies and credit card lenders.
Unlike a single credit card statement, using BNPL may require managing loans from several providers, each with its own due dates, payment amounts and retailers. Missing even one can be a costly mistake.
To avoid these drawbacks during the holiday season, stick to a clear budgetand only buy what you can pay for in full. If you’re in a bind and feel you need to buy something essential, like replacing a broken refrigerator, make sure you have a clear plan for repayment.
The ‘no fee’ trap
The allure of BNPL is that there’s zero percent interest. And if you pay as agreed, sure, that’s true.
However, you could face late fees if you don’t make payments on time. Each BNPL lender has different fees and policies, so it’s essential to review the terms and conditions carefully.
Also be aware that if you set up automatic payments using your bank account, you may incur an overdraft or non-sufficient funds fee from your bank if your account balance is too low and the BNPL payment bounces.
Paying a late fee and an overdraft charge can bring double financial trouble.
In a recent survey, LendingTree found that 41 percent of BNPL users paid lateon at least one loan in the past year, up from 34 percent a year earlier.
If your financial situation changes and you have no choice but to pay late, contact the company and request to have the fee waived. LendingTree’s November tracker of BNPL found that 85 percent of those who did that got the fee taken off or reduced.
Finally, remember that not all BNPL loans are interest-free. The interest on longer-term loans can be as high as that of a credit card, which averages about 20 percent.
Refund and return issues
Your mama hated the red sweater you got her, so she gives it back to you to return. If you had purchased it with a credit card, or better yet, cash, it’s not generally a problem.
But BNPL returns can be complicated. You must wait for the retailer to process the return and then for the BNPL provider to issue the refund. In some cases, you may still be required to make installment payments on the item while your return is being processed.
Fewer consumer protections
Before the Trump administration dismantled the Consumer Financial Protection Bureau, the agency was investigating BNPL products, hoping to put in place guardrailsto keep folks from overextending themselves. The agency was also concerned that BNPL products lacked the same consumer protections and disclosures as traditional credit cards.
But now, these consumer protection efforts have largely been left to the states.
This week, several attorneys general joined forces to send a letterto the six largest BNPL lenders requesting information on their business practices.
“BNPL providers may not adequately assess borrowers’ capacity to repay their loans,” said the letter, signed by attorneys general in California, Connecticut, Colorado, Illinois, Minnesota, North Carolina and Wisconsin.
The BNPL payment model aims to minimize the shock of the full purchase price. And therein lies the problem: If you don’t have the money now for a discretionary purchase, obligating funds from your future paycheck can lead to unmanageable debt.
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