As we wrap up the holiday season, you may be considering a buy now, pay later (BNPL) program to check off the last items on your list.
BNPL providers offer installment loans that allow you to pay off an item in equal payments—typically four, with the first portion paid upfront.
And it’s becoming more popular. Shoppers are expected to spend $18.5 billion using BNPL services this holiday season, or 11.4 percent more than last year, according to forecasts by Adobe Analytics.
Most major retailers have partnered with BNPL providers to offer some kind of BNPL program via their mobile app or online store. You can also visit the official websites of BNPL providers to shop with partners that may include companies like Amazon, Walmart, Best Buy, and Target.
Some popular BNPL lenders include Klarna, Afterpay, Affirm, Sezzle, and Zip.
But before you decide if BNPL is right for you, it’s important to understand all you can about it.
How Does BNPL Work?
Most BNPL programs let you pay off an item in four equal, interest-free payments every two weeks. You’d usually pay a quarter of the total price upfront to keep it and then you technically own it after you’ve completed your installments.
Here’s an example: Suppose you want to purchase a $400 laptop for work. A BNPL provider could allow you to pay it off in four payments of $100. You pay $100 upfront and your laptop gets shipped to you. And every two weeks, an installment payment of $100 is automatically deducted from the debit card or credit card you provided when you signed up for the service until you’ve paid in full.
Most BNPL lenders—keep in mind, this is a loan service—don’t charge interest on timely payments. And while most providers would determine eligibility based on some evaluation of your creditworthiness, many will take a soft inquiry into your credit history. This means it won’t impact your credit score.
Sounds easy—and it can be, as long as you make a purchase you’re comfortable with and pay it off as agreed with the lender, then there’s not much else to ponder.
But it doesn’t always work that way.
How Much Does BNPL Cost?
Although many leading BNPL providers don’t charge interest, you can bet they’ll slap you with late fees for missing payments. And that can thrust you into a financial downturn. Late fees or fees for rescheduled payments can be around $8 per missed payment, according to research by the Consumer Financial Protection Bureau (CFPB). Moreover, some providers cap fees at 25 percent of the purchase value. That could mean a $100 fee for missing payments on your $400 laptop. Plus, some organizations may charge interest on late fees. And what if you have multiple BNPL plans?
As you can see, BNPL can quickly pile on debt.
The Risks of BNPL
While many BNPL lenders don’t provide payment information to the credit bureaus, some do report late payments. This can deliver a serious blow to your credit score, as timely payments are among the most important factors that go into calculating your credit score. And missing your BNPL payments could also put your account in collections, adding even more damage to your credit. This can seriously impede your ability to make a major purchase like a home or car down the road.
Another note on interest is that some BNPL programs do charge interest on large purchases and longer pay-off terms.
But even if you decide that BNPL sounds like a deal you can get behind, it’s important to remember that it’s not a one-size-fits-all process.
How to Evaluate a Buy Now, Pay Later Company
BNPL is still a relatively new service in the evolving world of digital shopping. Lenders, retailers, advertisers, government regulators, and other players are still working on how to make it as efficient as it can be. But this uncertainty can open the door for scams, fraud, and unfair business practices.
This is why you should carefully vet BNPL companies. Read through their loan terms, disclosure forms, fees, and costs.
You can also look up their status with third parties like the Better Business Bureau (BBB). Reading through consumer reviews on sites like Trustpilot could also help.
Moreover, it’s also important to take a close look at the company’s refund and return policy.
In May 2024, the CFPB issued an interpretive rule that deemed BNPL lenders as credit card providers.
“Buy Now, Pay Later lenders must provide consumers with some key legal protections and rights that apply to conventional credit cards,” the CFPB wrote in a statement. “These include a right to dispute charges and demand a refund from the lender after returning a product purchased with a Buy Now, Pay Later loan.”
Is BNPL Right for You?
BNPL is advertised as a quick and easy way to buy something you want without having to pay for it upfront. And the possibility of no hard checks on your credit can make it even more appealing.
Unfortunately, these are often the kinds of services that appeal to many who don’t have enough cash at hand to make certain purchases or have poor credit. So if you’re going the BNPL route, make sure you’ve set up a budget to make all your payments on time.
But a word of caution for those who buy on impulse: BNPL is one of many entrants in the ever-growing world of e-commerce that has made shopping something that could basically be put on autopilot. It’s very easy to be bombarded with BNPL offers as you’re shopping online this holiday season (it’s available in some form at physical stores as well). So impulse buyers may find themselves tangled up in several BNPL programs, complicating an already troubled budget.
Here, consumers need to be very careful. But everyone considering a BNPL program should at least ask themselves this question before clicking anything: Do you really need it?
If you need equipment or supplies for work that you can afford to pay in installments, then BNPL can be a solid option. But if you want to buy the latest gadget to replace your old one that’s still in good condition, you may want to save until you can buy it outright.
That’s not to say, however, that BNPL can’t also be a good way to purchase material items you want for yourself or as gifts.
It ultimately comes down to planning. If you can afford to make all your payments and set up a budget that won’t suffer as these are automatically pulled from your checking account, then BNPL can be another useful tool for the savvy shopper.
The Epoch Times copyright © 2024. The views and opinions expressed are those of the authors. They are meant for general informational purposes only and should not be construed or interpreted as a recommendation or solicitation. The Epoch Times does not provide investment, tax, legal, financial planning, estate planning, or any other personal finance advice. The Epoch Times holds no liability for the accuracy or timeliness of the information provided.
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