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Should You Buy Now, Pay Later?

woman_holding_phone-with_buy_now_pay_later

If you’re shopping online these days, you’ve likely encountered a new payment option at checkout that allows you to defer payment on your purchases for a given period of time. These options are commonly referred to as “Buy Now, Pay Later” (BNPL) loans, and they are often promoted as interest- and/or fee-free. The big players in this industry are Affirm, Afterpay, Klarna, PayPal, and Zip.

Most often, BNPL programs split the cost of your purchase into four equal payments. You pay a quarter of the cost at the time of purchase and the other three over time (between six and eight weeks usually, though you can find longer terms). The application process is minimal and is available to people with a wide range of credit scores.

BNPL programs have risen quickly in popularity. It can be helpful for those who are low on cash, to cover the cost of essential items while they wait for their next paycheck. For those with money in the bank, it can be a way to hold onto funds longer so they can earn interest in a savings account during the weeks before the payment comes due.

 

THAT’S THE SALES PITCH. HOW ABOUT THE FINE PRINT?

Though BNPL can help in limited ways, its drawbacks can be crippling to consumers.

According to the Consumer Finance Protection Bureau (CFPB), consumers buy more when they are presented with this option. Interest-free, fee-free financing can feel like free money, and it is easy to imagine that a future paycheck will cover the costs of today’s purchase.

Using a BNPL loan may not cause a problem if you use only one, but people often use them to make multiple purchases with different merchants. This leaves them with multiple payments that have different payment schedules. Therefore, instead of one monthly payment, they’ve got payments scattered throughout the month on multiple days. It can be very confusing to figure out when payments are due and how much to keep in the account to cover the payments. In this type of scenario,  people may miss payments or cause other debits such as paper and electronic checks or other automated loan payments to be short of funds.

 

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BNPL loans don’t have the same consumer protections as a credit card or loan. Because many BNPL lenders don’t charge interest, they don’t have to provide the same disclosures you would receive for a credit card or loan account. In addition, these loans don’t offer the same protections as a credit card would if you need to dispute a charge, and if you return an item you have purchased using a BNPL loan, you may still have to make the payments until the return has been completed and accepted by the merchant.

Finally, most BNPL companies do not report payments to credit bureaus. This may seem like good news if your payments are overdue, but on the flip side, it won’t help your credit if you pay them on time. If you’re trying to build credit, your best bet is to buy with a credit card and pay it off on time, so your good purchasing behavior is rewarded with an uptick in credit.

 

THE BOTTOM LINE

The best plan for purchasing the things you want is to save first. If you think you can pay for something over the course of a month, use that time to save money and make the purchase then. This is a good plan for a couple of reasons. It ensures that you can truly afford the item and also gives you time to consider whether you really want it. BNPL loans may give people the opportunity to make impulse purchases they wouldn’t normally make.

If you do decide to use BNPL to buy something, read the agreement. Though many BNPL lenders are not required to provide disclosures due to the structure of the financing, they will generally ask you to sign an agreement that states the terms. Even if they promote it as interest-free, they may charge interest if you choose an option that allows you to make payments less frequently. Those that only promote zero interest may charge fees for late payments. The agreement is a contract, so make sure you understand what you are responsible for if you can’t follow through on the terms.

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Val Beaudin - Bio

About Valerie Beaudin

Valerie Beaudin is the head of consumer and residential lending at VSECU. She has devoted her career to helping people understand and improve their financial situations and how to gain access to responsible financing that supports their needs and dreams. Valerie believes that doing good for the member is how we do good for the organization, our community, state, and the world. She lives with her husband in central Vermont, and enjoys disc golf, cheering on the Boston Bruins, reading, and time with her kids.
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