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Beware of the Hidden Dangers of Buy Now Pay Later Services

The appeal of fast and easy credit through buy now pay later (BNPL) plans is alluring, but you should be aware of the hidden downsides.

October 14, 2022

Buy now pay later, or BNPL, is a common payment option for a wide range of goods and services—from clothing and home decor to flights. You can even use buy now pay later for hotels. Several BNPL providers are available, including Klarna, Affirm, Amazon, and PayPal, just to name a few. However, before you buy something through a BNPL plan, you should consider the hidden dangers of buy now pay later and think about other options, so you don't get into financial trouble. 

We’ll take a closer look at the dangers of BNPL plans and some payment alternatives to consider that may pose less of a threat to your financial situation.

What is buy now pay later?

BNPL is a deferred payment plan that allows you to buy items with little to no cash up front, followed by installment payments. These services have become more popular in recent years. According to a recent study by C + R Research, 51% of consumers reported using a BNPL plan during the pandemic. 

Although the features of BNPL appear similar to those of traditional layaway, credit cards or other loans, there are significant differences. Therefore, before making your next purchase, you should understand the hidden dangers of buy now pay later payment plans and make sure you don’t become a victim of predatory lending practices designed to entice unsuspecting borrowers.

How buy now pay later works

BNPL payment plans, also known as point-of-sale loans, are similar to a layaway plan. The difference is that BNPL works in reverse order of a layaway plan. You don't make payments over time before you receive your item. Instead, you receive your item upfront, then make your payments over time.

Opening a BNPL account is usually quick and easy. You can be approved in only a few minutes. A soft credit check is generally used for the approval, which won’t negatively impact your credit score.

You might be able to choose to make payments while online shopping by clicking a "pay later" button before you checkout. In addition, in-store purchases can be made easier with buy now pay later apps that many retailers now accept. 

In most cases, you will make a down payment of 25% and then spread the remaining repayments out over two-week intervals using an interest-free installment plan. Many BNPL lenders will ask you to provide a credit card, debit card or bank account for the remaining payments. However, BNPL plans have varying payment structures depending on the service you’re using.

The hidden dangers of buy now pay later

Spreading out the cost of an item over multiple payments is convenient. But before you sign up for a BNPL loan, you’ll want to understand the hidden dangers of buy now pay later. Specifically, be sure to consider the impacts on your credit score, the lack of consumer protections and how these loans encourage overspending.

The impacts to your credit score

In most cases, BNPL accounts aren’t included on your credit report (although Equifax is looking to change this). This means a buy now pay later loan won’t have a direct impact on your credit score — positively or negatively. 

However, BNPL plans may indirectly affect your credit if you use a credit card to repay the loan. The loan payment will be charged to your credit card, which will increase your balance and your credit utilization ratio. A high credit utilization may lower your credit score. 

The lack of consumer protections

According to a report from the Consumer Financial Protection Bureau (CFPB), it’s possible that borrowers who use buy now pay later services  won’t find the safeguards that are commonplace in the consumer finance industry. 

For example, a BNPL provider may charge late fees more than once for the same missed payment. In addition, there aren’t uniform disclosure standards about the cost of credit and some lenders may force a borrower to use auto-pay.

The temptation to overspend

Another problem for BNPL users is the temptation to overspend on expensive items you wouldn't otherwise purchase. 

Nearly half of consumers using BNPL payments said they increased their spending anywhere between 10% and 40% compared to using a credit card. Meanwhile, 47% said they wouldn’t have made the purchase without the BNPL payment option.

The ease and availability of checkout financing can lead you to abandon your budget, spend more than you can afford and rack up debt.

The threat to consumer privacy

The CFPB’s market report on buy now pay later services also mentions that there may be risks to consumers’ privacy and security. This is because many of the BNPL providers and apps engage in data harvesting and monetization.

Alternatives to buy now pay later

If you are having difficulty controlling your finances, BNPL may not be the best way for you to make purchases. Here are some alternative strategies to consider.

Budget your wishlist items

Wishlist items that cost more money than you have available don't have to be out of reach. You don't have to give up on your dream vacation or a luxury car. However, you will need to put your wishlist items on a budget and figure out the best way to save for them.

Find out as much as you can about the item or experience you want and how much it will cost. After you've paid for the things you need and saved for an emergency fund, keep putting a little bit of money aside at a time for your big-ticket item. You can then make the purchase once you’ve saved enough cash.

This strategy works great for larger expenses, but you can use the same strategy for lower-cost wants too.

Save money in a high-yield savings account

As you’re budgeting and saving for your wishlist items, consider putting the money aside in a high-yield savings account (HYSA). By maximizing the interest you earn on your savings, your money can go even further. As of September 2022, many HYSAs offer at least a 2% annual percentage rate.

Use a credit card 

Instead of using a buy now pay later loan, you could use a credit card instead. But keep in mind, you need to be careful with credit card use as well because you can also get into financial trouble if you overspend. However, using a credit card strategically — by budgeting for your purchases and paying off your balance in full each month — can have benefits.

First, a good credit score is crucial to your financial well-being and can be built through responsible credit card use. In addition, you may stretch your purchasing dollars further if you're eligible for cash back or other discounts and rebates on your purchases.

When paying with a credit card, you also enjoy enhanced consumer protections. For example, some issuers provide purchase protection that will reimburse you for lost or stolen merchandise in addition to examining any disputed charges.


Consider other alternatives before using BNPL

Before financing a purchase at checkout, it's a good idea to consider the hidden dangers of buy now pay later. From encouraging overspending to indirectly harming your credit score, a BNPL loan comes with more than just interest-free installments.

Instead, consider budgeting for the purchases you want to make and saving for them in a high-yield savings account to earn extra interest or using a credit card instead if you’re able to pay off the balance each month.

Do you have credit card debt that you want to pay off? Check out the Tally† credit card repayment app. It can help by combining your higher-interest credit card balances into a lower-interest line of credit.

To get the benefits of a Tally line of credit, you must qualify for and accept a Tally line of credit. The APR (which is the same as your interest rate) will be between 7.90% and 29.99% per year and will be based on your credit history. The APR will vary with the market based on the Prime Rate. Annual fees range from $0 - $300.