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As the world of online shopping continues to expand, so does the number of financial instruments available to facilitate your purchases.
‘Buy Now, Pay Later’ (BNPL) options are becoming increasingly popular as a flexible and easy way to manage payments on anything from clothes and electronics to bigger ticket items like furniture and vacations.
But, before making any commitments it’s important that you understand what BNPL offers, the risks and rewards they can bring, so you can make an informed decision about how best for you financially.
What Is Buy Now Pay Later?
Buy now pay later is a unique twist to installment loans. In fact, this is not a new payment option as they have been around for a long time, they have just become more popular in recent years.
With this type of loan, you are able to make small payments over a period of time without the worry of interest or additional fees. As a result, personal loans can be a great option if you don’t have the money to pay for something in full upfront.
For example, if you are shopping online, your total purchase might be $100.
Instead of paying the full $100 now, you can agree to a BNPL service and pay a small down payment of $25 now and then equal installments of $25 each month for the next 3 months.
Most of these loans do not charge interest or fees, as long as you pay on time.
But before using these services, it is important to know more about the advantages of drawbacks so you know if they make sense for you.
This is critical because recent studies show that over 45% of consumers have signed up for this payment plan option and 22% of the people who did, actually regret doing so in the first place.
Whereas a typical personal loan could take days or weeks until you get approved, BNPL providers can approve you in minutes.
Additionally, many BNPL services only do soft credit checks, so it will not impact your credit to take a loan out. And since the sign up form is on the retailer’s checkout page, you don’t have to open a new window to apply for BNPL loans.
Simply answer a few questions and get your approval in a matter of minutes.
Another benefit is you avoid paying interest.
As mentioned before, these personal loans offer an interest free way of buying things. This saves you money compared to credit cards or other loans.
In addition, some of these lenders will not charge any fees as long as you make your payments on time. This means that you can save a significant amount of money by using one of these services instead of a credit card.
Convenience Shopping Online
The first advantage is convenience.
The popularity for using this payment plan is because of the convenience factor. You might be living on a tight budget and need some clothes now.
Instead of having to resort to credit cards, you have the ability to take out one of these personal loans and have a smaller monthly payment option that is interest free.
And since many online retailers now offer buy now pay later services on the checkout screen when shopping, it is simple to sign up.
In many cases, buy now pay later programs allow you sign up for automatic payments. This means that your equal installments will get charged to your credit card or debit card without you having to pay the bill itself.
You can even connect your bank when signing up and have the monthly installments automatically get paid using your checking account.
This basically guarantees you will never pay late fees for missing a payment because you will always pay on the due date.
Alternative To Credit Cards
Some consumers might have dug themselves out of credit card debt and are fearful of going back into debt, so they want to avoid using their credit cards.
But they also don’t like the idea of online shopping using debit cards to pay for purchases either due to identity theft.
Buy now pay later is a great alternative for these people.
They avoid the risk of debt with their credit card and protect their identity at the same time.
High Interest Rate And Fees
Missed payments not only will impact your credit score, but it also comes with a late fee and other charges.
This can include interest charges too. And the interest rates buy now pay later programs charge tends to be higher than your credit card.
So before you use one, make sure you read and understand the fine print. Otherwise, the late fees and interest charges can make the total amount you pay a lot more than the item is worth.
In fact, if you have any doubt you will be able to make a payment, you might be better off putting the purchase on your credit card.
This will allow you to make a small monthly payment over a longer period of time and not risk the damage to your credit score.
Negative Impact To Credit Score
While using a buy now pay later plan won’t impact your credit report initially, if you don’t pay on time or miss a payment, it will be reported to the credit bureaus. And this will hurt your credit score.
Because of this, it is important to keep track of all the times you sign up for BNPL arrangements so you know you can afford the payments in the coming months.
The last thing you want to miss out making payments and ruining your credit.
Easily Increase Debt
One massive drawback to buy now, pay later is they increase your debt.
Because buy now pay later programs are so convenient, it is easy to get into financial trouble with them. This is especially true if you are prone to making impulse purchases.
The other impact is the small monthly installments you make.
You might not think twice to sign up and have a small balance due for a couple months. But use these plans for a few purchases and suddenly you are paying $100 a month or more.
While you won’t be adding to your credit card debt with these plans, you will be adding to your overall debt.
Harder To Get Refunds
When you pay for items with money or credit cards, the transaction is between you and the retailer.
If there is a problem, you can go to the retailer and request a refund for the item. But with buy now pay later, you involve a third party because you are making payments on the item for four months.
If you return the item, you have to deal with the retailer and the BNPL lender as well. In most cases this won’t be a problem, but it is more work than if you just paid for the item upfront.
Miss Out On Rewards Or Cash Back
Another drawback to using a BNPL provider is that you can make payment using your bank account and this is what many people do.
The problem here is if you typically pay using your credit card, you now miss out on any rewards points you would earn.
Depending on how often you paid with your credit card and how often you use these payment plans, you could miss out on a lot of rewards.
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I have over 15 years experience in the financial services industry and 20 years investing in the stock market. I have both my undergrad and graduate degrees in Finance, and am FINRA Series 65 licensed and have a Certificate in Financial Planning.
Visit my About Me page to learn more about me and why I am your trusted personal finance expert.