Popular ‘Buy Now, Pay Later’ programs come with help and headaches

(NEW YORK) — The Buy Now, Pay Later (BNPL) trend, a significant shift in shopping habits, emerged as a game-changer during the recent holiday season. It broke records and offered customers a refreshing alternative to traditional methods of making large purchases.

The BNPL payment option generated $16.6 billion in online sales during the 2023 holiday season. The method allows shoppers to purchase products in installments instead of paying the full amount at once. Thus, you can get the product immediately and pay it off over a fixed period.

With the BNPL trend, consumers have the freedom to pay finance companies such as Affirm, Klarna, or Afterpay over a fixed period. These are essentially installment loans — but with a twist.

BNPL programs typically offer short-term loans with fixed payments, no interest, and no additional charges, giving you the financial freedom to make those big purchases without the immediate burden of a large payment.

Other benefits of using BNPL to make a purchase are fast approval and the lack of a need for good credit or a high credit score. Women, people under 40, and users with lower income and credit scores are the most active users, according to research by the Federal Reserve Bank of New York.

Example on how Buy Now, Pay Later works

Suppose you plan to purchase a new TV for $250. When it comes time to pay, you may choose to pay in installments using services like Affirm, Afterpay, or Klarna.

To obtain a loan for your purchase, you may need to provide your personal information and undergo a soft credit check.

Once approved, you agree to repay the amount you owe over four equal payments. Each payment will be the same number, with the first payment due immediately and the others due every two weeks.

Spreading out payments for a big purchase, such as a TV or home appliance, can be helpful if you need more cash upfront.

What are the risks of using Buy Now, Pay Later?

There are a few drawbacks to using BNPL services. For one, paying off a BNPL loan typically won’t improve your credit score. Additionally, you won’t be able to take advantage of credit card benefits like cash-back or rewards points when you opt for Buy Now, Pay Later.

Another risk consumers face is forgetting to make payments, which can result in fees. A report by the Consumer Financial Protection Bureau found one of every ten borrowers in 2021, one was charged a late fee averaging $7 per missed payment. This is a way for payment companies to make money and stay in business.

If you used BNPL to purchase an item and want to return it, there could be some issues. You are entitled to a refund, but the merchant needs to inform the BNPL lender of the return, which could cause a delay.

You still have to make payments during this time, and missing or delaying payments could result in additional fees and negatively impact your credit score.

What can I do to avoid the risks of Buy Now, Pay Later?

If someone loses track of the payment cycle, their debt can spiral very quickly. To avoid this risk, consumers should set up auto-pay or keep track of payment due dates to avoid falling behind.

It is crucial to review a retailer’s return policy before making a purchase to avoid complications with returns and avoid being charged for returned items. Additionally, before using the Buy Now, Pay Later option, take a moment to assess whether it fits within your budget.

Other facts about Buy Now, Pay Later

It’s important to note that certain purchases may not be eligible for Buy Now, Pay Later financing. For example, some merchants may not offer financing for certain types of products or services.

Additionally, there are limits on the amount that you can finance through this payment option. These limits can vary depending on your credit score, income, and other factors.

To ensure that you qualify for Buy Now, Pay Later financing and to understand the terms and conditions, it’s essential to read the merchant’s financing agreement carefully and to consult with a financial adviser if you have any questions or concerns.