The Hidden Dangers of Buy Now Pay Later (BNPL)

Buy Now, Pay Later Basics

Buy Now, Pay Later is a type of short-term loan that allows consumers to make purchases and pay for them in the future. In most cases, lenders offer financing with no interest if you pay off the total within a month. However, programs have different terms and financing options that may increase your interest rate.

Consumers can make a purchase at any participating retailer and opt for a BNPL option at checkout. Once you set up a BNPL loan, installments are fixed, and you can pay off the amount you owe over several months to several years.

Payments can be made through a credit card, bank account, debit card, or autopay. Though, according to the Consumer Financial Protection Bureau, most BNPL lenders don't offer options other than autopay.

Benefits of Buy Now Pay Later

One of the reasons why so many Americans find Buy Now, Pay Later loans attractive is because of simplified access to funds. BNPL financing is often easier to qualify for, so it may be an attractive option for borrowers who aren't approved for personal loans or credit cards. Borrowing funds at a 0% interest rate is another major benefit.

Here's a summary of the benefits that make BNPL plans an effective option for many borrowers:

• BNPL service providers don't charge interest on certain purchase plans.
• Approval is usually fast and at the time of purchase.
• Consumers with lower credit scores often qualify because many lenders offer lenient or no credit checks.
• BNPL payments offer a simplified structure with most loans paid off over a few weeks.
• Most lenders require autopay, so you’re less likely to forget the payment.

Risks of Buy Now Pay Later

Although BNPL loans can seem like a good option, they can encourage overspending and may come with hidden fees. As a consumer, it’s important to understand buy now, pay later risks before you borrow so you can spend money wisely.

Here are the top risk factors associated with BNPL purchases:

High Interest Rates

Although most Buy Now, Pay Later lenders advertise their loans at 0% interest rates, it’s important you read the fine print before entering into a payment plan. For large purchases with a longer term, the plan may charge an APR of up to 36%.

Even if the loan is interest-free, if you finance it with your credit card and don’t pay your balance in full, you’ll typically pay high interest fees on the transaction.

Hidden Fees

Some BNPL lenders charge late fees and service fees. Charges for late or missed payments can be up to $15.

A few lenders also charge installment fees to set up a plan or a payment rescheduling fee if you make changes to your account. Fee structures vary by lender, so it’s essential to review costs before signing up.

Negative Impact on Credit Scores

One of the most overlooked buy now, pay later risks is the negative impact it can have on your credit history. Credit bureaus are starting to incorporate BNPL data into their credit reports.

If you make timely BNPL payments, it can help you boost your credit score. Conversely, late and missing payments can lower your credit score and make it more difficult for you to borrow in the future.

Risk of Overspending

One of the biggest risks of BNPL is that borrowers tend to overspend and purchase items they wouldn’t be able to afford if they were to pay for them upfront. This can lead to a lot of debt through online shopping, which can quickly become difficult to manage.

BNPL plans are designed to encourage more borrowing, and users may end up taking out several loans in a short duration. With so many monthly payments, you may find yourself living paycheck to paycheck.

Trouble Repaying Debt

If you take out too many BNPL loans at once, you may accumulate more debt than you’re able to pay. This can lead to financial stress and negative impacts on your credit score. Additionally, if your debt is turned over to a collection agency, you may receive calls pressuring you for repayment.

How To Minimize Buy Now Pay Later Risks

Ideally, you should only purchase items you can pay for upfront to avoid debt and keep track of payments. But if you can’t do that, it’s important to compare your options and shop around before starting a BNPL plan.

While there are several buy now, pay later risks, follow the tips listed below to minimize the drawbacks of BNPL loans.

Read the Fine Print

Before you take on a BNPL loan, carefully read the contract. Even if the transaction has a 0% interest rate, lenders may still charge service or late fees, making your purchase more expensive. Calculate all fees to determine the true cost of borrowing using a BNPL loan.

Pay On Time

Once you finance your purchase, it’s crucial to pay the installments on time. Most lenders charge a fee for late payments, which you can avoid by paying on time. Whenever possible, opt for Autopay so the installment will be automatically debited from your bank account.

Avoid Unnecessary Purchases

Think about whether you truly need to purchase something and always have a plan in place to repay it. If you can, wait until you’ve saved enough money to pay for the purchase upfront. Look for sales and shop multiple vendors to find the most competitive pricing that provides the best quality product.

Should You Finance Using Buy Now, Pay Later?

BNPL can help you make purchases immediately and pay for them later, in many cases, without interest. But if you’re considering financing a purchase with this option, be sure that you fully understand all Buy Now, Pay Later risks.

Brad Reichert, founder and managing director of Reichert Asset Management LLC, cautions against BNPL as a consumer option. “It’s clear to see that BNPL payment options have been gaining in popularity tremendously in recent years,” says Reichert.

“However, many Americans who have used BNPL have immediately regretted their decision, saying they wished they had not signed up for the plan,” Reichert adds.

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