6 Red Flags To Watch Out For With Buy Now, Pay Later Apps
Written by
Martin Dasko
Edited by
Gary Dudak
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The concept of buy now, pay later (BNPL) apps is to purchase an item immediately with the ability to repay this amount in installments in the future. This new technology has become an alternative to credit cards in recent years.
When you have no credit history, it can be confusing to figure out how to make significant purchases. This type of credit lets you split a transaction into smaller payments, often with interest-free installments. However, according to a survey conducted by LendingTree, almost 70% of BNPL app users admitted to overspending. This is why we will look at the red flags you need to watch out for with buy now, pay later apps.
Pitfalls of Buy Now, Pay Later Apps
If you’re thinking about using a BNPL app to make a purchase in the near future, you’re going to want to think about the risks involved. Here are six red flags to watch out for.
1. High Fees
According to the Consumer Financial Protection Bureau, a typical BNPL plan divides a transaction of $50 to $1,000 into four equal installments. The first payment is submitted on the checkout as a down payment. Then, the following three payments are often due in two-week intervals over six weeks. However, if you don’t make a payment on time, BNPL apps will charge late fees, starting at $7 for a payment on an average loan of $135.
It’s essential that you look into these fees so you understand what you’re getting yourself into. Many consumers prefer BNPL apps since the marketing revolves around the message of getting a zero-interest loan for a purchase you want to make. When you compare this zero-interest loan to the steep credit card fees, it feels like a no-brainer to go with one of these fintech apps.
However, if you can’t make your payments on time, you’ll be hit with late fees. These fees can quickly add up if you don’t have the money to pay off your purchase.
2. Exorbitant Interest Rates
What’s the interest rate like with a BNPL app? While this financing option is marketed as interest-free, this isn’t always the case when you look into the fine print.
According to Consumer Reports, some of these loans can have interest rates as high as 36%, calculated as “simple interest.” It’s crucial that you look into the fine print to see what the interest rate is because you don’t want to find out later on that you’re paying over 30% interest on a major purchase.
3. The Ease of Borrowing Money
Unfortunately, these apps make it easier to spend money by making large purchases you usually couldn’t afford. BNPL apps are known for attracting low-income and tech-savvy millennials and Gen Z customers.
A report by the CFPB discovered that BNPL users are more likely to be highly indebted with credit card debt and have delinquencies with other traditional credit products. These users are also likely to have used high-interest loan products like payday loans. The report indicated that these users have access to traditional credit as well.
If the BNPL app makes it too easy to borrow a significant chunk of change, you should spot this red flag because this could easily lead to overspending. With companies like Apple entering this financing space, you could find yourself racking up thousands of dollars in purchases because it was too easy to borrow money.
4. Complicated Payment Plan Structures
What’s the payment plan structure like? You want to ensure that you can make the payments on time, or else you will be dinged with fees. According to the CFPB, many BNPL products have confusing payment structures. This includes a lack of clear loan term disclosures, challenges with filling disputes, and a requirement to turn on auto-pay.
5. Credit Score Consequences
One of the attractive features of using BNPL apps to finance a major purchase instead of signing up for a credit card or going with a traditional loan from the bank is the idea that your credit score isn’t impacted. However, it’s important to note that some BNPL apps do indeed perform a “hard” credit check, which can ding your credit score up to five points every time.
You have to look into what type of credit check will be done before you use this form of credit. If you frequently make purchases with a BNPL app, you could damage your credit score, and it can take years to fix this.
6. Lack of Consumer Protection
When you purchase something on your credit card, you have certain protections that don’t come with BNPL apps. One of the most critical protections that these BNPL apps lack is the “chargeback” rights. With a credit card, you have these rights that allow you to legally stop payments from going through when you don’t receive an item or if you want to return it.
Since there’s no regulation on this new industry yet, it’s vital that you understand the lack of consumer protection that you have to accept when using these loan products.
What To Consider Before Using BNPL Apps
According to the LendingTree survey, 42% of BNPL consumers admitted to making a late payment, and 23% of users regretted using this financing option. This troubling information leads us to this next section on what to consider before trying one of these apps.
Here are a few questions to ask before using a BNPL app:
- Do you understand the payment terms? You have to know how the payments will work and if you’ll be paying any interest or fees.
- Will you be able to pay this item off? You want to ensure that you’ll have the funds for this purchase in the future to avoid fees.
- Can you wait to save up for this purchase? If possible, could you try to save up before using BNPL financing?
Closing Thoughts
With the holiday season approaching, it will be tempting to use a BNPL app to finance a purchase. It’s essential that you understand the terms and the possible consequences of using this financing option.
While a BNPL app can be a helpful financing option when you want to make a larger purchase, this form of credit could lead to overspending, putting you into debt that’s difficult to pay off.
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