Use Caution With Buy Now Pay Later Services

By Kris McDowell

Providing an alternative to using a credit card for their purchases, some retailers offer “buy now, pay later” (BNPL) services. Consumers are generally well aware of the interest rates their credit card purchases incur, but it’s important to understand that buy now, pay later options aren’t without their own risks. According to Take Charge America, a nonprofit offering financial education and counseling service since 1987, these services are responsible for $100 million in annual transactions and millions of Americans are using them. 

“People love the convenience, but there remains a lot of misunderstanding surrounding BNPL services and their impact on people’s financial lives,” said Amy Maliga, a financial educator with Take Charge America. “With that confusion, it’s easy to miss the potential risks. That’s why it’s always important to take a closer look at a new service or product—especially ones that make it easier to part with your hard-earned money.”

Before using BNPL services, Maliga says it’s important to keep in mind the following:

They are a form of credit. 

BNPL providers may promote themselves as a simpler way to pay for everyday purchases without relying on debt or credit, but don’t be fooled–BNPL payments are a type of credit. And if you miss a payment, some services charge late fees or interest. Be cautious when using these services, as you can easily get in over your head.

You’ll likely spend more. 

There’s a reason retailers aggressively promote BNPL–people tend to spend more using these services. A LendingTree survey found two-thirds of shoppers spent more using BNPL plans than they would have otherwise. Before completing that latest purchase, check your budget and bank account. Be sure you can really afford what you’re buying instead of putting yourself at risk of falling into debt. 

Inconsistent credit score impacts. 

Most BNPL providers don’t report on-time payment data to the major credit bureaus, meaning you receive none of the upsides of responsible repayment. However, negative events like missed payments or collections activity are likely to be reported. This makes it even more critical to make your BNPL payments on time and avoid missing any.

No consumer protections. 

Because of BNPL’s standard four-installment payment plans, these services fall outside the purview of the Truth in Lending Act. Federal law requires five installments before triggering any regulations. Translation: consumers have no protection from any potential predatory or deceptive lending practices with BNPL providers. 

Lending Tree reports that BNPL is most popular with shoppers ages 18-24, an age group that may be more leery of using credit cards. Often BNPL repayment terms are every two weeks, rather than the standard once a month payment that credit cards typically have. This can make it easier to miss payments, resulting in late fees and/or interest being charged.

It’s easy to get caught up in the buying of gifts for loved ones during the holiday season. Before hitting the stores in person or online, take a realistic assessment of what you can afford to spend. Whether you intend to use cash, a credit card or are offered a BNPL option, you’ll be keeping your long term financial health in mind.

Use Caution With Buy Now Pay Later Services

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