Buy Now, Pay Later Programs Carry Risk

Buy now, pay later (BNPL) programs can be enticing for people who are short on cash and ready to make a purchase. These programs are low- or no-interest installment payment plans retailers, often online merchants, may offer at the time of purchase. BNPL plans may be helpful for those who are nearing their credit card limits or don’t yet qualify for a credit card.

Experian, one of the nation’s leading credit reporting agencies, noted that from 2019–2021, the number of BPNL loans from popular providers increased by 970 percent. It makes sense; BPNL programs don’t require a credit check and allow consumers to pay for purchases over a period of time, which is more manageable for some budgets. But they also carry risks.

How BNPL programs work
When you agree to a BNPL payment program, you will make equal installment payments on a set schedule over several months, like a personal loan. You will pay no interest if you pay the required amount in full and on time. Credit cards, by comparison, charge interest each month on any unpaid balance. According to LendingTree, the average credit card interest rate in America is 24.61 percent, and at five-year high point. Even if you carry only a small balance, the interest charges alone could take a big bite out of your monthly budget. This alone makes BPNL programs attractive.

It's easy to be approved for a BPNL. They may not require a credit check which is ideal for consumers without a credit history or those working to rebuild one. Before you sign a contract, though, read the fine print to understand all terms and possible penalties.

What’s the risk?
If you’ve struggled to make on-time credit card or loan payments in the past, a buy now, pay later program may not be the best option, even if it sounds like a good deal. Review the terms and know your grace period (the deadline by which you must make a payment before incurring a late fee). Many BPNL plans require multiple payments within the same month.
 

34% of buy now, pay later users have missed payments.
Source: Credit Karma/Qualtrics survey, August 2021
 

BPNL’s can give you a false sense of affordability, encouraging you to spend more than your budget can manage. Some even charge a fee on top of the purchase price. This means you’ll pay more than you would have if you paid in full at the time of purchase.

Review the schedule for all your automatic payments and ensure you’ll have enough in your  account to cover the payment when it is deducted. If not, you could pay overdraft fees. If you can’t make your payments on time, the BNPL provider could turn the account over to a collection agency, which puts your credit score at risk.

72% of buy now, pay later users who missed payments say their credit scores fell afterward.
Source: Credit Karma/Qualtrics survey, August 2021
 

Quick tip
A U1 credit card with a $0 balance transfer fee and $0 monthly fee is another way to get short-term, interest-free financing. An added advantage: using the card responsibly can help you build a good credit record, which could be helpful in your pursuit of future financial goals.

You also have stronger consumer protection when you use a credit card. In addition to investigating disputed charges, some issuers offer purchase protection that will cover your costs if items are damaged or stolen. Having help when you need it can be well worth making a payment sooner rather than later. 

If the BNPL program isn't the right fit for you, consider exploring our signature personal loans, or take the traditional route of saving your money. U1 also provides free Financial Advisors who can assist you in assessing your complete financial landscape and devising the optimal strategy to manage your bills and achieve your objectives. Schedule an appointment today to delve deeper into these offers.

BNPL can be an effective way to spread out the pain of a large purchase. But before you sign on the dotted line, be sure to take a good look at the fine print and understand all the costs involved. If you can stay on top of your payments, reputable BNPL services are a great way to avoid interest. But make sure you can pay off the loan on time to avoid interest charges and late fees.