I Think Everyone Should Avoid Buy Now, Pay Later Programs

  • Buy now, pay later programs are ubiquitous, but they make it too easy to spend more than you have.
  • They are loan programs, and they come with late fees up to 30%. One in three users has been late on a payment.
  • As a financial planner, I recommend saving up for these purchases instead of putting off payment.

Ever filled up your online cart and gone to the check out only to see it’s way more than you wanted to spend? Enter buy now, pay later, a popular financing option that lets you make a small payment up front and walk away with your entire cart.

Sounds too good to be true? I would argue it definitely is. I consider it a form of predatory lending, and it seems like others are catching on: The Consumer Financial Protection Bureau recently began investigating BNPL companies to see if consumers are racking up more debt than they can handle.

As a financial planner, I always recommend against using BNPL programs. Here’s why.

How buy now, pay later works

Buy now, pay later is a short-term financing option that allows you to break up larger purchases into smaller ones, spread out over a period of time. While each program works differently, most split up a purchase into four equal payments over six weeks. You’ll typically have to put down around 25% of the purchase to receive your items, essentially removing any price friction from the online shopping experience.

BNPL is everywhere. Sometimes referred to as alternative financing, BNPL is integrated with most online retailers, exploding during the pandemic as more people spent time at home and shifted their shopping habits online. Over half of all Americans have used a BNPL service before, with an average purchase size of $ 690.

There are third-party companies offering BNPL, like Afterpay, Affirm, and Klarna. And recently, large retailers like Amazon and Apple rolled out their own financing options.

BNPL programs are basically loans

Though it goes by another name, buy now, pay later is essentially a type of installment loan.

Though it markets itself with perks like interest-free payments, the ability to apply, get qualified, and pay using BNPL in under a few minutes with just a few clicks makes it much easier, more convenient, and more dangerous than getting a traditional personal loan.

With a regular personal loan, you’d have to apply directly from a financial institution, which would take into account your


credit score

and other financial factors. With most BNPL programs, you’d only undergo a soft credit check, and they tend to be more lenient with their approvals.

BNPL financing may make things that you previously could not afford seem within reach, like that fancy new rug or pricey new computer. It can be easy to view a product as cheaper than it actually is and not forecast how it really fits into your budget.

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Why I always recommend against BNPL programs

In theory, buy now, pay later is a great option to budget for large purchases over time – as long as you pay it back on time. If not, you could wind up paying late fees or, in some cases, interest, sometimes up to 30%. This is fairly common: A recent study found that one in three consumers who use buy now, pay later have fallen behind on one or more payments, and 72% said their credit score declined due to BNPL.

I believe buy now, pay later plays right into our desire for instant gratification over delayed gratification, and encourages impulse purchases. When we want something and have the option to pay for it now (especially with a discount), we take it – and assume we’ll be able to deal with it in the future. Unfortunately, we can not always predict the future, and may wind up taking on more debt that we’re able to pay off.

The short length of most BNPL programs also makes it difficult to find the funds to pay off the loan on such short notice. Plus, if you purchase multiple items using this financing option, you’ll face a combined monthly payment that could be much larger than you anticipated. And if you can not pay it back, you may face fees, interest, and debt. More than half of people say they regret making a purchase through BNPL because it was too expensive.

While using BNPL smartly is possible, I think the potential downsides can vastly outweigh the positives. In most cases, I advise saving up for the types of purchases that often take BNPL, like clothing, furniture, or technology. Oftentimes, these aren’t “essential” products, and you will not need them right away – and once you save up and have enough money, you may realize you did not really want or need it after all.

The bottom line? Avoid buy now, pay later.

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