Buy Now, Pay Later: Beware of the Risks

Multicultural young girls shopping and paying with credit card in boutique, fashion shopping girls concept stock photo
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You want to buy an awesome gift off your childhood friend’s wedding registry. And you want something equally great to wear to the wedding – but your big commission check won’t be coming for a few weeks. As you stare at the items in your online shopping cart, pondering whether to whip out your credit card and take the plunge, you see the words on your screen: Buy Now, Pay Later.

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Buy Now, Pay Later allows you to make a down payment on your purchase and pay off the balance over the next several weeks or months, depending on the amount spent and the provider. A number of companies offer the service, and you might be familiar with some of the names, which include Affirm, Sezzle, Klarna and Afterpay. Even PayPal has gotten in on the trend with its Pay in 4 product.

It’s an increasingly popular way to pay, too. According to a Wall Street Journal article, a credit-reporting firm report found that 57% of consumers who used buy now, pay later loans or short-term payment plans would experience a material credit-score decrease that could persist for over a year.  

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Buy Now, Pay Later is the modern-day layaway, although it works in reverse. Some stores still offer layaway plans, which require you to make a down payment, then make set payments and specified intervals. When you’ve made all the payments, you can take your items home. With Buy Now, Pay Later, you make your down payment, receive the contents of your shopping cart right away and then pay off the balance.

Sounds simple, right? Yes. But hidden dangers lurk, and you could find yourself in financial trouble if you aren’t careful.

How It Works

Buy Now, Pay Later programs, for the most part, are straightforward. You apply at the time of purchase, and the provider typically will run a soft credit check that won’t impact your credit score. You’ll get your answer and line of credit within seconds, and you can arrange to link your payment to your bank account, debit card or credit card.

Using Buy Now, Pay Later really is the equivalent of taking out a short-term loan. Some providers won’t charge interest or fees as long as all payments are received on time, but others will, and the interest rates can be hefty — around 20%. And, as much as we all hate reading the fine print, it’s important you do so to know just what you’re signing up for.

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The Consumer Financial Protection Bureau cautions that you should look for whether the company reports to credit bureaus, as well as the late fees and other penalties you could incur should you fail to pay your debt as promised.

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The Hidden Risks

The goal of a Buy Now, Pay Later transaction, of course, is to complete the repayment plan without a hitch. But here’s an idea of just what can go wrong.

Insufficient Funds Charges

If you’ve signed up for automatic payments from your bank account or credit card, your bank could assess an overdraft change if you don’t have enough money available to cover the transaction.  

Late Fees and Interest

If you forget to make a payment, you could be assessed a late fee. And then interest might be assessed on a purchase that originally was supposed to be interest-free.

“It can be easy to forget about making payments. These programs are built on making a payment up front and then again every two weeks for six weeks until the item is paid off,” said Julie Ramhold, a senior staff writer with DealNews.com, a shopping comparison site. “However, if you don’t set up notifications through the service, or you have multiple purchases you’re paying on, it can be easy to lose track of them and accidentally miss a payment. Most of the services will provide some kind of reminder, whether in-app or via email or something similar; but, if you miss those, then you run the risk of missing the payment entirely.

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“If you’re late on any payment, you’ll often be charged late fees, depending on the service,” she added. “You can usually find out what these fees will be capped at — 25% of the total purchase, for example — but you might not readily know that unless you read the fine print before using one of these services.”

Temptation To Overspend

The seemingly free loans that Buy Now, Pay Later programs offer could entice consumers into buying things they really don’t need, just because the plans offer interest-free payments.

“Although Buy Now, Pay Later programs have made it simpler for customers to purchase things, fears are developing that some individuals may get trapped in a debt cycle as a result of their increasing popularity and virtually ubiquitous presence in the marketplace,” said Jeff Mains, an entrepreneur and CEO of Champion Leadership Group.

“There is an evident danger associated with BNPL programs in that the supposedly inexpensive payments may lead you to overspend. Millennials and Gen Zs, in particular — who represent a significant portion of BNPL’s target market — are at a time in their life when they must cultivate appropriate financial habits. Products such as BNPL do not assist since they make impulsive purchasing simpler, resulting in a compulsive practice of spending money when one does not have the financial means.”

Less Protection Than a Credit Card

Credit card companies have strict federal regulations that are designed to protect consumers, but those rules haven’t reached the Buy Now, Pay Later market. The Consumer Financial Protection Bureau says, for instance, that credit cards offer protections for disputes or faulty products, and returning merchandise bought on the payment plan can be more difficult than getting a simple credit for returned goods put back on your card. The bureau warns that Buy Now, Pay Later customers still could be responsible for making payments even after they’ve returned the product.

Buy Now, Pay Later isn’t for everyone. Before signing up, assess whether this purchase truly fits into your budget. Unless you are extraordinarily organized and won’t forget you’ve signed up for this debt, you might be better off choosing to skip this purchase until you can pay cash.

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About the Author

Jami Farkas holds a communications degree from California State University, Fullerton, and has worked as a reporter or editor at daily newspapers in all four corners of the United States. She brings to GOBankingRates experience as a sports editor, business editor, religion editor, digital editor — and more. With a passion for real estate, she passed the real estate licensing exam in her state and is still weighing whether to take the plunge into selling homes — or just writing about selling homes.
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