by Elizabeth Aldrich | Sept. 17, 2020
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Buy now, pay later services are booming, but do the people using them understand the fine print?
You've eyed a new couch for months now, or maybe the latest tech for your home office set-up. You can front the $2,000 it costs, or you can pay just $500, then finish paying in installments -- with no interest!
If the latter sounds tempting to you, you're not alone. This is the premise of dozens of new buy now, pay later (BNPL) services cropping up online, and they're catching on quickly, according to a BNPL study by The Ascent. Unfortunately, many using these services may not fully understand what they're getting into.
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The general concept behind buy now, pay later services has been around for a long time. Anyone who shopped in department stores in the 1980s or 1990s will likely recall layaway programs that allowed shoppers to set aside an item they wanted, put down a deposit, then pay the remaining balance over time. Once the item was paid in full, the shopper could pick it up.
While some stores still offer layaway service, most retailers discontinued these programs years ago, possibly due to the ubiquity of credit cards. Now that department stores are on their deathbeds and younger generations are increasingly wary about using credit cards, a solution for the digital age has emerged: buy now, pay later (BNPL) services.
Afterpay, PayPal Credit/Bill Me Later, Affirm, Klarna, and FuturePay are just a few of the many BNPL services that have popped up in recent years. You'll often find them as a payment option on the checkout pages of major online retail sites. They might say something, beneath a total of $400, like: "Or 4 interest-free installments of $100 by Afterpay."
As of July 2020, over a third of U.S. consumers have used a BNPL service, according to the Ascent's study. The majority of people surveyed first used a BNPL service in 2019 or 2020, so it's likely that coronavirus-related income loss has motivated some newcomers to this convenient financing option. A very small minority of folks who have used a BNPL service -- just 7.42% -- had used one before 2015.
In other words, for most people, BNPL is very new, and their experience with this payment option -- and its potential shortcomings -- is limited.
When shoppers see the option to pay in interest-free installments and click "yes" without reading the fine print, they're often missing crucial information. According to the BNPL study, this happens with most users.
Only about 22% of people surveyed -- those who have used BNPL services before -- said they understood all the terms and conditions of those services. This means that nearly four out of five BNPL customers are using a new financing service without knowing exactly how it works.
This doesn't mean all of these people are doomed; those who make their agreed-upon payments in a timely manner will probably be fine. Those who trip up, however, might be in for a costly surprise.
Perhaps the biggest pitfall is missing your agreed-upon payments and not paying off your balance in full before the interest-free period ends. These BNPL services might offer special interest-free terms, but the apps have to make money somehow. Often, it’s by charging sky-high interest to anyone who doesn't pay off a balance on time.
These services can charge interest rates of up to 30%, well above what you'd be charged by almost any credit card. Almost all these services charge late fees, and some even calculate them as a percentage of your initial order value, which can be extremely costly.
One of the sneakiest pitfalls with any type of interest-free financing is deferred interest. When interest is deferred rather than waived, interest still accumulates during the entire interest-free period. If the balance is fully paid off during that period, you pay no interest. However, if any balance remains when the interest-free period ends -- even $1 -- you are charged interest on the entire purchase, going back to the purchase date.
Buy now, pay later services offer a convenient, greatly needed option for larger purchases, especially in the midst of the COVID-19 pandemic. Just make sure to read the fine print before you use them.
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