The 3 Biggest Dangers of 'Buy Now, Pay Later' Services

by Lyle Daly | Updated July 21, 2021 - First published on Sept. 3, 2020

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If you're not careful, "buy now, pay later" can lead to money problems. Here are the risks you should know about.

On the surface, "buy now, pay later" (BNPL) services present an enticing offer. You make a purchase, and then you pay it off over a series of fixed installments instead of all at once. This makes big expenses much easier to handle, especially when you don't have enough saved to pay in full. And unlike with zero-interest credit cards, you don't need good credit to qualify because there's usually no credit check required.

What's not to love?

Despite the perks of BNPL, there are also a few ways you can get into trouble with it. If you're thinking of using a BNPL service, it's important to be aware of how it could end up costing you money or hurting your credit.

1. It tempts you to make unnecessary purchases

Easily the biggest danger of BNPL is the temptation to overspend. If you've encountered BNPL offers, then you probably know what this feels like.

When that tablet, exercise bike, or whatever else you've had your eye on costs $1,000, you think long and hard about whether it's worth the money. But when you see that you could also buy it for a mere $42 a month for 24 months, it suddenly feels a lot more affordable.

You've still spent $1,000, though. Only now you'll be playing catch-up over the next two years. While your monthly payments may not seem like much, that's money you could invest in stocks or save.

To be fair, BNPL can be a good way to finance a purchase. You just need to consider whether the purchase is important enough that you want to commit months or years to paying it back.

2. Missed payments carry costly penalties

BNPL works out well if you make all your payments on time. The provider won't charge you fees or interest, and those payments will be a positive on your credit history. However, the arrangement goes south if you miss a payment.

If that happens, you may get charged a late fee. The amount depends on the provider, and in our study on BNPL services, we found that it varied considerably. A select few, such as Affirm, don't have late fees. Most do. Some of the most expensive are PayPal Credit, which charges up to $39, and Afterpay, which charges up to 25% of your initial order value.

A missed payment could also mean that the provider will charge you interest on your balance. And if you don't make your payment for 30 days or longer, this can be reported on your credit file and drop your credit score.

3. The interest rate can skyrocket if you don't pay off your balance in time

One of the best parts of BNPL is that you can pay off your purchase without paying interest. Of course, this doesn't last forever. You'll have an interest-free period, but if you don't pay in full within that time, then the provider charges interest. And in some cases, the minimum payment amount isn't enough to pay off the balance in time. It's important to do the math yourself to make sure you're paying enough.

Three of the providers we looked at in our study charged interest: Affirm (up to 30%), PayPal Credit (23.99%), and FuturePay (a $1.50 finance charge for every $50 in unpaid balance). Even compared to credit cards, those rates are on the high side.

Use with caution

BNPL services certainly have upsides. They offer convenient, interest-free financing without strict approval requirements.

At the same time, those benefits make it easier to overspend with BNPL. It's important to be careful about what you buy, so you aren't taking on debt for something you don't really need. And if you do use BNPL, make sure you always pay on time and pay off your purchase in full before the interest-free period ends.

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