What is Buy Now, Pay Later?
Buy Now, Pay Later (BNPL) services like Afterpay, Klarna®, and Affirm are growing in popularity, especially among Millennial and Gen Z shoppers. These services allow you to buy items over a set period instead of paying the total upfront. Originally popular in the clothing and beauty industry, the service can be used to purchase everyday needs, like groceries. While there are benefits to using BNPL services, you should be aware of the potential downsides before entering into this type of agreement. Let’s review the pros and cons of using BNPL services to help you make an informed decision.
Potential BNPL Benefits
- Convenience
- No upfront interest or fees
- Make payments over time
- Faster application approval than traditional lenders
One of the most significant selling points for Buy Now, Pay Later services is their convenience. Paying over time can lessen the upfront impact on your budget. Some BNPL services offer interest-free financing unless you are late or miss a payment. BNPL services often provide flexible payment options, allowing payments in equal increments over time. These services could appeal to consumers with several financial obligations or budgetary constraints. The potential for faster approval and a simplified online application makes the process even easier for consumers.
Possible BNPL Drawbacks
- Higher fees than some traditional loans
- Potential to quickly add unwanted debt
- Temptation to overspend
- Unpaid loans can damage credit
- Having several loans makes payment tracking difficult
While many BNPL services promote little to no interest, that changes if you miss or make a late payment. Once that happens, interest rates could rise to 36%.[1] Some plans also charge late fees. Many of these services require auto payment from your checking account, and if you have insufficient funds, your financial institution may also charge a fee. This, coupled with the temptation to overspend, could damage your credit and leave you with hard-to-manage debt. Most Buy Now, Pay Later services don’t report positive payment history to the Credit Bureaus, but they could negatively affect your score after a late or missed payment. Using BNPL services for multiple purchases simultaneously may be tempting, but remembering to track several charges can become complicated. Finally, if you need to return an item, consider the merchant’s and BNPL company’s policies, which could become cumbersome.
When to Use Buy Now, Pay Later Services
There are pros and cons to using Buy Now, Pay Later programs. As a rule of thumb, we suggest only using BNPL services when it is vital. If you’re considering utilizing this type of service, make sure to read the terms and conditions carefully and have a plan to pay off purchases on time. If paying for an item in full isn’t an option, consider using a credit card. There is no interest if you pay the purchase off in total during the credit card’s grace period. Some cards, like CTFCU’s 2% Cash Back option, help you earn rewards for each purchase. Best of all, you build a credit history by paying on time, and there is only one payment and due date to manage. To learn more about Carolinas Telco Federal Credit Union’s credit card features and benefits, visit www.ctelco.org/credit-cards/ or contact us today!
[1] https://www.investopedia.com/buy-now-pay-later-5182291
Sources
https://money.com/buy-now-pay-later-benefits-risks/
https://www.seattletimes.com/sponsored/the-pros-and-cons-of-buy-now-pay-later/
https://www.cuinsight.com/the-pros-and-cons-of-bnpl/
https://www.nytimes.com/2022/12/29/your-money/buy-now-pay-later-loans.html
https://www.investopedia.com/buy-now-pay-later-5182291
[1] https://www.investopedia.com/buy-now-pay-later-5182291
