By Kenneth May
Given our current economy, it’s understandable that more online shoppers are looking for more flexible, creative ways to finance their lifestyles. One of the most popular credit options is “Buy Now, Pay Later,” or BNPL, a type of instant financing first popularized during the COVID-19 pandemic.
Strained by job losses and benefit reductions, thousands of Americans now use BNPL as an economic survival tool, stretching out payments for basics such as food and clothing. Others view BNPL as a way to preserve cash flow. Buying now and paying later allows you to acquire expensive items without needing a down payment.
BNPL also appeals to those who can’t obtain credit cards or qualify for loans but who still want to reap the advantages of spreading out monthly payments. For example, people rebuilding their finances after bankruptcy may use BNPL to obtain necessary items while they work to restore their credit. Many BNPL loans are also structured interest-free if you aren’t late or miss a payment. That feature might save you thousands of dollars. And many BNPL users say they like that the BNPL application process is generally much easier and quicker than traditional loans.
However, as helpful as BNPL could be, there are risks, especially for those at or near retirement age or who may not have the resources to repay these loans. If you don’t make your payments on time, you could be subject to expensive fees and interest charges that can add up quickly. BNPL could potentially create a situation where seniors enter retirement with a heavy debt load that eats into their income stream and negatively impacts their lifestyles.
Another obvious downside to buying now and paying later is that unless you are incredibly disciplined, you could make impulse purchases you might have otherwise avoided. Many companies offering this option are counting on BNPL to ease your concerns and remove barriers, making it easier to say “Yes” to things you may not need.
The terms and conditions for BNPL loans are not always explained very well at the point of purchase. Most consumers don’t understand precisely how the loans work. For instance, missing even one payment may trigger penalties that could make your purchase cost more than you anticipated. And unlike most credit card companies, you usually can’t call the BNPL issuer and work things out.
Another issue some BNPL users encounter is that it is a lot more challenging for them to get refunds for purchased items, even in cases where the item is defective. So, you could get stuck with something unsatisfactory and still be on the hook for making payments. That said, more big brands are offering these options, so you can always stick with what you know if you decide to BNPL. You should always take a few minutes to check out the vendor you’re considering to see if there are bad reviews or issues surrounding product quality.
How does BNPL work, anyway?
As mentioned, many consumers don’t fully understand BNPL. However, many of you may remember the old-fashioned “layaway” programs offered by many merchants in the pre-online shopping era. Well, think of BNPL as a layaway in reverse. Instead of going to the store and making payments over time on your layaway item, you get your purchase up front, then make scheduled payments later.
You can typically set the payments up through a phone app or, with brick-and-mortar merchants, at the register. You then decide if you want to link automatic charges to your debit card, bank account, or sometimes to a credit card. Approval is nearly instantaneous and does not count against your credit score. BNPL plans have multiple payment arrangements. However, most require at least a small down payment, usually about 25% of your total bill. You pay the remainder every two weeks in equal, interest-free installments. Other pay-later plans are offered by third-party providers such as PayPal, Citigroup, and American Express, letting you do four installments of interest-free payments. These installment plans often have fees and interest charges significantly less than a regular credit card.
What are some other downsides of buying now and paying later?
In addition to the downsides I mentioned, those considering BNPL should know about other potential issues with this process.
BNPL cons include:
Lack of regulation: BNPL, unfortunately, falls into the regulatory gray zone. For the time being, at least, buy now, pay later plans lack the same consumer protections as credit cards and receive little to no oversight from regulators. Most BNPL companies also don’t stop payments on disputed purchases, making you contact the merchant first if you want a refund or need to return an item. You may not have the time or energy to be that vigilant. Compared to a traditional loan or credit card, monitoring issues with a BNPL is more involved and places most of the responsibility on the loan recipient rather than the lender.
Confusing and non-standardized terms.
Since BNPL is a new credit option, there is no standardization. Trying to figure out late fees and interest can be confusing. If you sign up for BNPL with multiple lenders, you can’t expect they will be the same. For instance, one lender may charge late fees automatically while others give you a “grace period.” If you miss a payment, many BNPL lenders will stop you from making further purchases until you pay your bill and any late fees.
Summing it up: While buying now and paying later may seem like a dream come true, the process contains some hard-to-spot traps that could spell trouble. You might be more inclined to blow your budget on impulse items or overpay for essentials. You also have little to no control over when your payments must be made and could get costly charges for being even one day late. BNPL is very hands-on, meaning you will need to wade through agreements to understand precisely what happens if you miss a payment or need a refund. You’ll also have to monitor any issues to ensure that the company received your payment on time or processed your refund. When thinking about adding a BNPL purchase, you should always consider your current financial situation and ask yourself if you truly need the item you’re considering.
