In my article last year on Buy Now Pay Later (BNPL), I noted that “depending on how you manage your finances and credit, BNPL credit can be useful or just another way to accrue more debt.” Unfortunately with inflation hitting highs not seen in decades, many people seem to be falling deeper into debt. Here are some of the dangers to watch out for before you purchase with BNPL.
Impulse purchases
It’s so easy to click on something and purchase it, whether you need it or not. Before BNPL, you may have been kept in line by the limited amount available on your credit card. Now it’s easier than ever to simply agree to pay in several installments over the coming weeks. That $150 pair of sneakers becomes a $38 pair of sneakers if you make four payments. Many people forget the total cost and spend more than they intended.
Purchases at several stores
Doing this at one store may be bad, but with BNPL offered at most online retailers now, you can easily lose track of how much you’re spending and – perhaps as importantly – how much will come due in a couple of weeks. If you aren’t writing down or otherwise keeping track of your spending by store, you could easily find yourself in trouble when the bills come due.
Hard to budget
Many people try to line up their BNPL spending with their paychecks. This way, you are paid before the next installment is removed from your checking account. But if you’ve forgotten one of the purchases, or you have an emergency that requires you to spend money, suddenly you may be hit with late fees and interest charges if you deplete your account. In fact, a recent Credit Karma report found that a third of BNPL users reported being behind on their payments.
Using BNPL for routine purchases
Some see BNPL as a replacement for or addition to their credit card; this means they have no problems buying everyday essentials like food and then paying for them over weeks. A product initially created for large-ticket purchases has morphed into an everyday loan product to help you purchase bread or coffee.
Inexperienced users
Subprime borrowers (those considered to be high credit risks for a lender) and younger shoppers are the highest percentage of users of BNPL. Many young consumers have never experienced inflation like we’ve had recently. As such, they may be more reliant on this for everyday needs or may not have gone through the process of paying off loans.
BNPL users don’t get credit protections
BNPL services aren’t covered by the same laws as credit cards, meaning you may be hard pressed to settle disputes if you receive a broken or wrong product, or get your money back in cases of fraud. This is especially important if you are in the market for larger ticket purchases (think expensive electronics like TVs and computers). In those instances, using a credit card may make more sense.
Mishmash of reporting
Some BNPL companies report a borrower’s activity to credit bureaus; others don’t. While this may not seem to be a problem, it could allow people to continue receiving credit even when they are already overextended and have been unable to pay back their current loans. Plus, if you are a conscientious borrower, companies that don’t report do nothing to help your credit score as using a credit card would.
Given the headaches associated with BNPL loans, you may be wondering why they are offered at all. Retailers love them; in report after report, sales increased the minute BNPL was offered at checkout. One consumer noted that they would have had to put something back but once they saw the opportunity to pay their bill over time, they actually went and added more to their cart.
Like other loans, it’s up to the borrower to manage BNPL. This means determining up front if you even want to use this type of service. If you do, for what level of purchase? $200? $500? Or are you willing to use it for everyday purchases? Whatever you decide, you will need a way to track and total your spending so that you aren’t caught by surprise when the payments come due.
Finally, consider your purchases and how you’ve bought things in the past. For many of us, shopping is a type of recreation or stress reliever. Use some of the tricks with in-person shopping (like making a list or taking things out of your cart after you’ve thought about them more) no matter if you can afford it or not. There’s no one saying you have to spend 100% of your available funds.