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Weighing the risks of “buy now, pay later”

Financial Planning

Already many big retailers offer buy now, pay later (BNPL) as a payment option. It’s also popular with consumers. BNPL offers several advantages — instant approval and no interest or finance charges as long as the consumer pays installments on time. Delinquent payers, however, may face late fees and BNPL purchases may not come with consumer protections.

If you shop online, you’ve probably noticed that many retailers — including Amazon, Target and Walmart — offer buy now, pay later (BNPL) as a payment option at checkout. Available for both small and big-ticket items, BNPL is quickly gaining in popularity with consumers. According to a 2021 survey by Credit Karma, 44% of Americans have used it at least once. Should you?

Spread the payments

BNPL may seem like a no-brainer. After all, it allows you to spread the payments over several weeks or months, often with no interest or finance charges. And approval typically takes minutes, with no “hard” credit inquiry. However, before you choose to BNPL, make sure you understand some risks:

Late fees. Even though most BNPL purchases are interest-free, missed payments may result in late fees that can add up over time. For example, a common late fee is $7 or $8, capped at 25% of the past-due amount. In addition, you may be blocked from making future purchases until you pay overdue amounts. And keep in mind that if you set up automatic payments from a bank account or debit card, your bank may impose overdraft or nonsufficient fund fees if your balance isn’t adequate.

Retailers typically partner with financial technology companies or other financial services providers to offer BNPL, and late fees or other terms vary by provider. Review these terms before you click “buy.”

Credit reporting. Many BNPL providers don’t report to credit agencies. This can be a disadvantage for younger people trying to build a credit history. Be sure to familiarize yourself with BNPL providers’ credit reporting policies before using their services, so you understand the potential impact. If a provider does report to credit bureaus and you miss a payment, it could hurt your credit score. According to the Credit Karma survey, of those respondents who said they missed a BNPL payment, 72% reported seeing their credit scores subsequently decline.

Consumer protections. BNPL programs generally don’t offer dispute protection and other consumer protections that apply to credit card purchases. And it may be more difficult to return a BNPL purchase and receive a full refund.

Know your budget

The ability to make purchases now and pay for them later, with no interest, can be tempting. But don’t let convenience cause you to overextend yourself. Know your finances and budget, weigh the risks, and avoid BNPL purchases unless you’re confident you’ll be able to meet your payment obligations.