Pay-after services are simply not worth the risk.
The holiday shopping season is a busy time of year, especially when shopping for multiple people. Whether you’re shopping for gifts for others or buying yourself something nice, you’ll likely see those options to buy now, pay later with Affirm, Afterpay, Klarna, or even PayPal’s installment plans.
These are known as Buy Now Pay Later (BNPL) plans, which have exploded in popularity in recent years. According to data from Adobeduring Black Friday and Cyber Monday 2022, the use of BNPL increased by 88%, which is a bit worrying.
When you can quickly make a small payment up front and still buy everything or add more items to your cart, it’s easy to spend more than you can afford. While flexible payment options are helpful, these tools are risky and can cause problems.
Here’s what you need to know about Buy Now Pay Later plans and why you should avoid them.
How Buy Now Pay Later Plans Work
The name says it all. You get everything you want without paying for it all at once. Think of BNPL as a short-term financing option, also known as “alternative financing.” Affirm and Afterpay are two of the most popular providers you’ll see while shopping online.
How each one works varies slightly, but the general idea is the same. Within minutes, you can apply, qualify, access funds, and you’re done. You pay nothing up front or something like 25% of the total, then pay the rest later.
Better yet, these services often don’t do a credit check or report on your credit, so they’re available to everyone. Even if you probably shouldn’t use it. And unless it’s a large loan, it won’t report on your credit, so these services usually can’t help. build up credit.
Afterpay is a popular option that asks for 25% first, then lets you pay another 25% every other week, like payday, which is helpful for people on a budget. You can split a large purchase into four equal payments without paying interest. Depending on which BNPL service you use, some even offer longer loans of more than 48 months.
Buy Now, Pay Later plans are so popular that they’re even available with select items at Amazon, Apple, PayPal, and more. And while everyone claims you can buy things “interest-free,” that’s not entirely true, especially if you miss a payment.
What happens when you miss a payment?
These services say things like, “Financial wellness is just a touch away” or “buy what you want with no fees or surprises,” which sounds nice, but is certainly misleading.
Unfortunately, these services are often used by people who are already struggling with bills or income. If you miss a payment, you’ll be charged interest, even if the company doesn’t charge late fees. Those are two different things. All you need to do is forget once or be late, and now you’ll spend more money than the item originally cost. Interest rates vary, but be prepared to spend a lot of cash if you miss a payment.
While the primary use for BNPL is quick loans that you’ll pay off in 3-4 payments with no interest, larger purchases or longer loans may incur interest charges. In fact, on a large purchase, you may need to qualify first, and the interest rate could be as high as 10-36%. A sizeable purchase of $1,000 could cost you more than $1,300 or more after payments and interest. Rough.
Depending on the size and duration of the loan, some are interest free and some are not. And if you have a longer loan with interest and you miss a payment, that rate will skyrocket. It’s lose-lose unless you’re on time for each payment.
Sure, these can be useful tools if you’re good with finances, saving for big purchases, and sticking to a budget. On the other hand, if you manage your finances carefully, you probably won’t need BNPL’s services in the first place.
It’s not to say that everyone who uses BNPL can’t afford the things they’re trying to buy, but it does cater to that segment of buyers. Short-term purchasing power to get the things you want. It’s the TikTok of shopping, with impulse buys and instant gratification.
Along with convenience fees, potential late fees, and interest rates that skyrocket if you miss a payment, there are other risks associated with these services.
For one thing, most of them don’t let you choose your payment date or reschedule a payment if you need to. That could cause users to rush to find funds or finish late. And since BNPL’s services are unregulated, you don’t get the same protections as a credit card. Things like lost shipments, return policies, fraud, or damaged and defective goods.
Buy Now Pay Later plans also leave no leeway for other life events to come your way. Think unexpected expenses, sick days that lower your paycheck, or car trouble that will waste your time. You can’t reschedule a payment and you’re out of luck. And in those situations, most of these services don’t even have a customer support phone number to call.
Those are just a few of the many potential risks you’ll face with BNPL, and that’s before mentioning that you’ll be spending money you don’t have to begin with.
Should you use BNPL loans?
While we can’t say what you should or shouldn’t do or what’s best for your situation, it’s a good idea to avoid BNPL short-term loans.
Yes, BNPL can be great for a quick 3-4 payment session, but spreading out a purchase over a long period, especially something expensive that you don’t necessarily need, is not the best decision. Furthermore, according to Consumer Affairs, a third of Americans using BNPL have missed a payment or are behind. Danger!
To make matters worse, when you combine buy now pay later services with all those “get paid today” apps where you get paid daily instead of every two weeks, you’re asking for trouble. This is because you are spending your money when you have it (or even if you don’t have it) and making big purchases, and then having to pay for them later. It leaves no leeway for unexpected expenses, fees, interest, or whatever else life throws your way.
At the end of the day, avoid these services. If you must use one, you’ll want to carefully consider what you’re buying, how long the loan is good for, and how long you might be in debt. And always pay attention to interest rates or late payment information. Keep all of that in mind before your next impulse buy.