3 Dangers of Using 'Buy Now, Pay Later' Plans

Buy now, pay later may be a convenient option for consumers, but it's not without risk.

One of the reasons so many consumers like using credit cards is that they let you make a purchase today and pay it off when it's convenient. Of course, the downside of going that route is racking up interest charges on the things you buy. But it's a downside many consumers are routinely willing to absorb.

"Buy now, pay later" (BNPL) plans work similarly in that you can spread out your payments for a given purchase over time rather than pay for a purchase up front. But unlike credit cards, you won't be charged interest on the items you pay off over time, provided you make your payments when you're scheduled to.

A recent survey by The Ascent found that BNPL plans have experienced explosive growth among consumers. But here are three risks you'll take on if you use this option to shop.

1. You may be tempted to spend more than you can afford

With BNPL, you only have to pay for a portion of your purchase up front, and you can finance the rest over several months. That makes buying things you can't afford immediately a lot easier. But that also means you could end up spending more than you can swing.

Say you want to purchase a $500 gadget but only have $50 to work with. If you can spread your payments out, you may be inclined to buy that item. But in reality, if you only have $50 worth of wiggle room in your budget, it may be a sign that you probably shouldn't be buying a $500 item unless you need it in an emergency (such as if you're a freelance writer and that $500 item is a laptop you need to do your job).

2. You could get hit with fees and penalties if you don't make your payments on time

What gives BNPL plans an edge over credit cards is that they don't charge interest off the bat. But if you fall behind on your payment schedule, watch out -- you could get stuck with expensive penalties and fees that make your purchases cost a lot more.

3. Your credit score could take a hit

BNPL plans don't require you to have a great credit score to qualify. In fact, these services don't require a hard inquiry on your credit report as other loans do. But if you fall behind on your BNPL payments, your credit score could take a major hit, the same way your credit score could plummet if you were to fail to make your credit card's minimum payment by its due date.

Are BNPL plans a good idea?

The short answer is that they can be. If you're confident you can keep up with your installment payments, then BNPL can be preferable to credit cards because you're not signing up to pay interest off the bat. The key, however, is to be careful not to take on more payments or higher payments than you can afford because that's where you get into trouble.

Before you use a BNPL service, make sure you understand what monthly payment you'll be looking at, and make sure it fits into your budget. If you'll be paying $100 a month for the next few months for a given item but you can swing that, then that's a purchase you can feel more confident making. Just be sure to run those numbers before entering into an agreement.