Imagine you're shopping online for a birthday gift. Once you find something you like, you proceed to the checkout. As you check out, you notice the company offers a buy now, pay later (BNPL) option. "Great!" you think since you planned to pull money from your savings account to purchase the gift.
With BNPL, you put $50 down (25%) and pay the remaining $150 off in three bi-weekly payments. What's more, the BNPL charges no interest and no fees unless you miss a payment. It's difficult to imagine anything that could go wrong, so you answer a few questions, allow the company to run a soft credit check that won't impact your credit score, and make the purchase.
While you might have nothing but positive experiences with BNPL purchases, it's essential to be aware of what could go wrong.
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1. No one checks your credit
Normally, when you take out a loan, the creditor checks to ensure you're creditworthy. They look at your gross monthly income and check your debt-to-income ratio to ensure you earn enough to make payments. However, one of the things that appeals to some BNPL consumers is that no one runs a hard credit check. While the company may run a soft check, it's not comprehensive.
While a no-credit-check loan may sound great, it can be tricky. That's because there's no gatekeeper, no one to tell you that you can't afford to take on more debt. The ease with which you can make purchases using BNPL may override the part of your brain that carefully considers each purchase before you make it.
2. You could end up spending more
Let's say you're shopping for a Burberry handbag and find one marked down from $1,895 to $1,200. While you wouldn't normally spend so much on a handbag, you quickly calculate that you'll only have to put $300 down and can pay the remaining balance with three $300 payments. In the moment, that seems reasonable.
Here's the issue: The convenience of BNPL plans can lead to impulse purchases. At the very least, the easy payment plan could discourage you from shopping around to ensure you get the best deal.
3. Returns can be challenging
According to the California Department of Financial Protection & Innovation, returning a BNPL purchase can be a bear. BNPL purchases may not come with the dispute provisions that apply to credit card purchases. So, if your package goes missing or arrives crushed, you have fewer built-in protections.
There's another tricky issue at play. When you use BNPL, your total purchase price is divided into smaller installments. However, the BNPL provider pays in full on your behalf. When you make a return, the item goes to the retailers, but the refund goes to the BNPL provider, and it's up to that provider to apply the refund to your account.
In the meantime, you may have to continue making payments until the return is properly logged with your BNPL provider. Failure to make payments (if required) could lead to late-payment penalties and even loan default.
4. It can be easier to get in over your head
The ease with which you can spend money with BNPL is both a blessing and a curse. It's nice to buy the things you need without jumping through the hoops associated with a traditional personal loan or applying for a credit card. However, it's easy to spend more than you intend or get into the habit of stacking BNPL purchases.
There's no rule saying you can't have six or eight outstanding BNPL purchases, which is the same as having six or eight outstanding loans. If you find yourself worried that you'll miss a payment or wishing you could skip a contribution to your retirement plan, you may be in over your head.
A nice benefit
One of the most beneficial things about most BNPL services is that they charge no fees or interest on your purchases if you make all payments on time. If you're looking for a short-term commitment and don't want to use a credit card, there's nothing quite like it.
There is one catch: If you miss a payment, the BNPL servicer will likely hit you with late fees and an interest rate of up to 36%.
As an adult, you're more than capable of making financial decisions that benefit you. If you plan to utilize a BNPL plan, do the math and ensure the payments fit neatly into your budget, including any investments you hope to make for the future.
