Whether shopping for holiday gifts or treating yourself to the latest fashion, home decor or must-have electronics, you may be tempted to pay for those purchases using a new method that has become increasingly common in recent years. “Buy Now, Pay Later” (BNPL) services have grown exponentially in popularity, offering an enticing alternative to credit cards and an easy way to impulsively splurge on a bigger ticket purchase. A 2022 report from the Consumer Financial Protection Bureau found that from 2019 to 2021, the number of BNPL loans originated in the U.S. by the five lenders it surveyed grew from 16.8 million to 180 million, highlighting just how appealing these services are to consumers. According to the Federal Reserve Bank of New York, 20% of Americans surveyed used a BNPL app in the fourth quarter of 2023, and many did so to fund their holiday shopping.
The Allure of BNPL
You have probably seen services like Affirm, Afterpay, Klarna and Zip offered right at checkout through many well-known online retailers and some brick-and-mortar stores, too. These services allow you to buy what you want now and pay for it over time; no need to wait for your next paycheck or save up for months. Add to that an interest-free option and this feels like a no-brainer, especially when budgets are tight. With BNPL, you can spread that $200 coffee table over four payments of $50, making it easier to fit into your monthly budget. It’s convenient, quick, and feels like a smart financial move, but it’s important to understand the fine print.
The Hidden Costs
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Falling Behind on Payments: According to LendingTree, nearly half of BNPL users (47%) have paid late on one of these loans at some point, up from 40% in 2023. When this happens, you can be hit with late fees, which can quickly add up and make the total cost of your purchase higher than expected.
Impact on Credit Score: Some BNPL providers report your payment history to credit bureaus, which means missed payments could hurt your credit. On the flip side, you may think regular on-time payments will help with your credit score, but that’s not a given since not all BNPL services report positive payment history.
Risk of Overdrawing Funds: When you sign up for a BNPL service, you often have to give them access to your checking account for automatic payments. If you forget about a payment or spend more than you expected, the BNPL provider can still withdraw funds from your account. This could lead to an overdrawn account, resulting in additional overdraft fees from your bank.
Debt Accumulation: Because BNPL makes it so easy to purchase now and pay later, it can encourage overspending. You might be more likely to buy things you don’t really need, simply because the payments feel manageable. This can lead to debt accumulation, making it harder to reach your financial goals.
Finding Balance
How can you enjoy the convenience of BNPL without falling into financial traps? The key is to use these services wisely. Treat BNPL like any other form of credit. Ask yourself if you can afford the payments without stretching your budget. Get a clear picture of what you have to work with by downloading this helpful budgeting worksheet.
Avoid using BNPL for impulse purchases, and always read the fine print to understand any potential fees or penalties. If you find yourself struggling with BNPL payments, don’t hesitate to reach out for support. Click here to access free credit counseling, budgeting advice, education and much more.