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10 Things to Know Before Using 'Buy Now, Pay Later'

Author: Kailey Hagen | November 30, 2021

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Stressed about holiday shopping?

The holiday season is here once again, and you might already be feeling the strain on your wallet. With so many expenses on your list, you might be tempted to try out one of the buy now, pay later (BNPL) services that seem to be cropping up everywhere.

This can be a smart way to finance your holiday purchases if you can't afford to buy everything up front. But it's important to understand what you're getting into before you sign up. Here are 10 things everyone should know about BNPL services.

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1. How they work

Buy now, pay later services are similar to a short-term loan. You choose the item you want, pay a little money down, and then it's yours. Unlike layaway, you don't have to wait until you've paid the full price before you can take your item home.

You pay the rest back in a series of installments over time. The terms are set by the BNPL service. Each company operates slightly differently.

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2. The minimum cost of the purchase

Many BNPL services require purchases to cost a certain dollar amount in order to qualify. This limit can vary by company, so it's a good idea to check into the rules with the BNPL service you're considering to make sure it's even an option for you.

If one company won't finance your purchase because it's too small, another company might be willing to. And if you can't find any BNPL service willing to work with you, you may just have to save up for that item on your own.

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3. The maximum cost of the purchase

BNPL services often restrict how much a person is allowed to finance using this service. The limits usually depend on the borrower's credit history and the repayment terms set by the company.

Usually, you'll be able to find out whether your purchase qualifies for BNPL at checkout, so if for some reason it doesn't, you won't be able to complete your purchase unless you use another method, like a credit card.

ALSO READ: 3 Reasons to Open a New Credit Card for Your Holiday Shopping

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4. How repayments work

It's common for most BNPL services to require buyers to pay 25% down when they make the purchase. Then they pay the remaining amount in three installments, each two weeks apart. But there are also some companies that offer longer repayment terms.

Make note of when you're expected to make each payment and whether the company will automatically charge your card or whether you have to pay them manually. It's crucial to make your payments on time to avoid issues.

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5. How much your payments will be

Before completing the purchase, look at how much you'll be expected to pay in each installment and make sure you're comfortable with that. This is especially important if you're using BNPL for several purchases.

Keep track of all your payment amounts and their due dates and make sure you have enough money to cover it all. If you're concerned about falling behind on your payments, it might be worth waiting a while until your other items are paid off.

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6. Whether there's interest

Most BNPL services that require you to pay the full cost of the item over four installments don't have any interest, but others, especially those with longer repayment terms, could charge interest. If this is a possibility for you, make sure you inquire about what the interest rate is and when it kicks in. If you don't, you could find yourself paying a lot more than you originally planned.

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7. What happens if you pay late

Paying late usually brings late fees, though the exact amount varies by company. The BNPL service could also report your missed payment to the credit bureaus, which can hurt your credit score.

Read the fine print and familiarize yourself with the consequences of not paying on time, even if you don't foresee yourself having any difficulty making the payments. Make sure you're comfortable with those terms and look into another payment option if not.

ALSO READ: How Will One Late Payment Affect My Credit Score?

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8. How it could affect your credit

While late payments to a BNPL service could hurt your credit, paying on time may not help them. BNPL services don't always report all of your payment history to the credit bureaus, so it might not be the best option for those looking to build credit. You can always ask the company if you're not sure what it reports to the credit bureaus.

You might also want to inquire about the type of credit check the company does when you apply for the service. Most do a soft credit inquiry, which doesn't affect your score. But some do a hard credit check, which can lower your score by a few points.

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9. How they could influence your shopping habits

Some argue that BNPL services tempt people to overspend, which could lead them into debt. This is especially dangerous if the service charges interest on the purchase. Sometimes, interest rates can be as high as 30%, which is higher than what many credit cards charge.

This isn't the case for every BNPL service, but you need to make sure you read the fine print and have a clear idea of how much you'll have to repay and when. This will help you avoid any extra fees or credit issues.

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10. What your alternatives are

If you don't think a BNPL service is right for you, there are other ways you can finance your purchase. You could look for a credit card that offers a long 0% introductory APR period or you could take out a personal loan. These charge interest, but they give you a longer repayment term. You may also be able to borrow more than you could from a BNPL service.

Or you could just set aside a little money each pay period and hold off on buying the item until you can afford it. Make sure you weigh the pros and cons of all your options to figure out which one makes the most sense for you.

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Is buy now, pay later a good fit for you?

Only you can decide if a BNPL service makes sense for you this holiday season. Think about how much you plan to spend and how much cash you have available right now. Then compare the fine print of a few different BNPL services to see which one makes the most sense for you.

The Motley Fool has a disclosure policy.

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