The Hidden Dangers of Buy Now Pay Later (BNPL)
7 MIN READ
Published September 29, 2023 | Updated October 30, 2023
Buy now, pay later (BNPL) is a short-term financing option where consumers can purchase a product and pay for it over time in installments. These loans are also known as point-of-sale loans and are often advertised to have 0% interest. While it’s a convenient and often cost-effective option for consumers, there are several buy now, pay later risks that you should be aware of. If you take on too many loans and are unable to repay them, your credit score can be damaged.
What Is Buy Now, Pay Later?
Buy now, pay later is a type of short-term loan where you can make purchases and pay for it over time. In most cases, lenders offer financing with no interest, but programs may have different terms. The installment is fixed, and you can make a purchase at any participating retailer and opt for this option at checkout. The amount you owe can be paid off in a series of installments over several months. The payments you make can be paid through a credit card, bank account, debit card, or autopay. In most cases, though, BNPL lenders do not offer options other than autopay, according to the Consumer Financial Protection Bureau (CFPB).
One of the main differences between buy now, pay later, and other types of loans and credit cards is that BNPL usually doesn’t involve any interest. If you have a 0% APR credit card, you may be able to make the same purchase through a credit card without paying interest on it.
Risks of Buy Now Pay Later
Although BNPL loans can seem like a good option on the surface, they can encourage overspending and may have hidden fees you’re now aware of. As a consumer, it’s important to understand buy now, pay later risks before you borrow so you can spend money wisely.
High Interest Rates
Although most BNPL lenders advertise their loans as 0% interest rate, it’s important you read the fine print to ensure that’s the truth. For large purchases that have 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 pay high interest on the transaction.
Some BNPL lenders charge late fees and service fees. Fees for late payments and rescheduled payments can be up to $15 and may be capped at 25% of the purchase price, based on the company’s policy. The fee structure varies by lender, so it’s important to check in advance for what fees you might pay on your purchase.
Negative Impacts 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 like Equifax now incorporate BNPL data into their credit reports. If you make timely payments, it can help you boost your credit score. But, paying 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 things they wouldn’t be able to afford if they were to pay for it upfront. This can lead to a lot of debt through online shopping, which can be difficult for you to manage. BNPL plans are designed to encourage you to borrow more. BNPL users may end up taking out several loans in a short duration, and with so many monthly payments, you may find yourself living paycheck to paycheck.
Not Being Able to Pay It Back
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 can lead to negative impacts on your credit score. If your debt is turned over to a collection agency, you may receive collection calls.
Benefits of Buy Now Pay Later
One of the reasons why so many Americans find buy now, pay later loans attractive is because of the benefits the lenders advertise. BNPL is easier to qualify for, so it may be an attractive option for borrowers who do not qualify for personal loans or credit cards. The ability to borrow at a 0% interest rate is another major benefit. Here are some benefits of BNPL that make it an attractive option for many borrowers:
- In many cases, BNPL service providers do not charge any interest on purchases, which can be a major draw.
- It’s a convenient way to pay for your purchases over time in installments.
- Approval is fast and is usually on the spot.
- You don’t need a good credit score to qualify because most lenders don’t conduct credit checks.
- BNPL payment structure is easy. Most BNPL loans are paid off over a few weeks. Most lenders also require autopay, so you’re less likely to forget the payment.
How To Minimize Buy Now Pay Later Risks
Ideally, you should only purchase items that you’re able to pay for upfront because it helps you avoid debt and keep track of payments. But if you can’t do that, it’s important to compare your options and shop around. While there are several buy now, pay later risks, you can follow the tips listed below to minimize the downsides.
Read the Fine Print
Before you take on a BNPL loan, be sure to read the fine print. Even if the transaction has a 0% interest rate, there may be other fees involved, which may make your purchase expensive. Pay attention to late fees and service fees to see what your true cost of borrowing may be.
Pay On Time
Once you finance your purchase, it’s crucial to pay the installments on time. Most lenders will have a steep late payment fee, 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
It’s always a good practice to only purchase what you truly need, regardless of how you’re paying for it. This is especially true when it comes to the use of BNPL. 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.
The Bottom Line on Buy Now, Pay Later
BNPL can help you make purchases immediately and pay for them later, without interest in many cases. But if you’re considering financing a purchase with this option, be sure that you fully understand 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.
Read the terms and conditions and ensure you’ll be able to make the payments on time. Weigh the pros and cons of this option against personal loans and credit cards to ensure you’re making the right decision with your money management.