The Dangers of Buy Now, Pay Later

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Watch out for these potential pitfalls. 

Buy now, pay later (BNPL) payment options has been gaining popularity in recent years, growing by 1,000% since 2019. It’s a way for shoppers to purchase items online without having to pay for them upfront, essentially allowing them to spread out payments over time. But what many shoppers don’t realize is that BNPL can come with some hidden dangers — especially when it comes to their financial health. Here are the potential risks associated with BNPL and how consumers can protect themselves.

How does BNPL work?

BNPL allows shoppers to purchase an item or service upfront and then pay for it over time. This type of financing option can be extremely helpful for those who need a bit of extra time to save up but don’t want to miss out on a deal. Just as when you use a credit card, you are making a promise to pay back the money. The biggest pros are that there are typically no interest charges or late fees associated with these services. BNPL simplifies and streamlines the financing process.

In addition, there is no credit check required with BNPL since withdrawals come directly from your bank account. You can typically pay off your purchases in fixed installments over a set period of time that usually ranges from three to 12 months depending on the provider. But is BNPL too good to be true? Here are some hidden dangers and what you need to know before signing up.

The risk of overspending

One of the major risks associated with BNPL is that people tend to overspend on items they wouldn’t normally be able to afford if they had to pay upfront. This can lead to excessive debt that may be difficult for some people to manage. According to the Consumer Financial Protection Bureau (CFPB), close to a third of BNPL users have struggled to make the payments and to avoid defaulting on their plan, they had to skip paying an important bill. As a result, close to 1 in 4 (22%) Americans who have used BNPL have immediately regretted their decision, saying they wished they had not signed up for the plan.

The Consumer Financial Protection Bureau (CFPB) states that BNPL “is engineered to encourage consumers to purchase more and borrow more. As a result, borrowers can easily end up taking out several loans within a short time frame at multiple lenders or Buy Now, Pay Later debts may have effects on other debts.”

Potential fees, interest, and rewards

While BNPL plans typically don’t charge interest, more providers are starting to, along with charging late fees. If shoppers are unable to complete their BNPL payment plan, they can be charged additional fees. Depending on the provider, these fees can add up quickly and cause even more financial strain than expected. This can lead shoppers further into debt if they’re not careful.

BNPL plans may advertise that they charge no fees, but only half of the BNPL users surveyed by the CFPB stated that their plan was completely free. Of those surveyed, 14% said they paid a flat fee; 7% paid late fees; 8% paid interest of 30% APR or less; and 4% paid an APR higher than 30%. The remainder did not know how much they paid in interest.

It is important for consumers to read through their BNPL agreements carefully before signing up. They should understand exactly what types of fees they may be charged if they miss a payment or default on the agreement altogether. In addition, while your credit isn’t checked when applying for BNPL, your credit score can be impacted if you don’t make a payment on time. With BNPL you also don’t get points, miles, or cash back like you might with a rewards credit card.

What consumers can do to protect themselves

Fortunately, there are some steps shoppers can take in order to protect themselves from the potential dangers of BNPL:

Make sure you understand the interest rate or fees that will be applied if you miss a payment.Don’t purchase items you wouldn’t normally buy just because they’re offered as part of a BNPL program.Always read the terms and conditions carefully before committing.Set reminders for yourself about upcoming payments or due dates.Consider other forms of financing such as credit cards (which offer greater protections) instead of relying solely on BNPL programs.If necessary, seek professional help from an experienced debt counselor who can guide you through repayment options.

Buy now, pay later offers a convenient way for consumers to purchase items without busting their budget, but it also comes with certain risks that need to be taken into consideration. By understanding those risks and taking necessary precautions, shoppers can enjoy the convenience of BNPL while avoiding its potential dangers. Understanding these concepts will ensure shoppers are comfortable and prepared before committing themselves financially.

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