Lately when you’ve been shopping online with major retailers, you’ve probably noticed a new payment that makes the price look much “smaller” than it really is. If you were to click this option, you’d be taking advantage of a service called “Buy Now, Pay Later”.
Buy Now, Pay Later is when the total price of the item you’re buying gets broken up into 4 to 5 smaller payments. Essentially, you’re getting a short-term loan from a service provider (such as Affirm, AfterPay, and Klarna), and you’ll then pay them back interest-free.
Buy Now, Pay Later is a trend that’s grown rapidly in popularity. From 2019 to 2021, the number of these loans in the U.S. increased by a staggering 970 percent, from 16.8 to 180 million. How much is that worth in dollars? The value of those originations has gone from $2 billion to $24.2 billion.
While breaking up the payment into a handful of smaller pieces sounds innocent enough, financial experts are growing concerned about Buy Now, Pay Later loans, and rightfully so. If you’ve used one or are considering signing up, then here are five things you’ll need to watch out for.
1) You’ll Spend More Than You Normally Would
Although Buy Now, Pay Later sounds like it’s designed to be a convenience for shoppers, there’s really only one thing it’s doing: making it easier for you to buy more things.
Consider how much more tempting it is to pay $30 for something that would otherwise cost you $150 today. When all you have to do is pay a fraction of the cost, it tricks your brain into thinking that you can afford a lot more than you really can.
It’s been shown by researchers from the Harvard Business School that people who use Buy Now, Pay Later loans typically spend 10 to 40 percent more when paying with these loans than they would with a credit card.
Plain and simple, Buy Now, Pay Later encourages you to overspend by inflating the number of items you put inside your online shopping cart. This can have significant financial consequences, especially for those people who are already living paycheck to paycheck.
Since each service forces the buyer to agree to automatic payments, there’s a strong potential that one of these payments may trigger the buyer’s bank account to become overdraft. When that happens, you may be hit with multiple charges by your bank such as an overdraft fee and non-sufficient funds (NSF) fee. If that happens, you’d end up paying way more for the item than you would have had originally if you had just paid for it all at once.
2) Consequences for Missed Payments
Even though Buy Now, Pay Later may seem like a cost-free way to make paying for something easier, the truth is that missing one or more payments can cost you dearly as follows:
- Late fees. Just like a credit card or mortgage, the Buy Now, Pay Later loan provider will charge you as soon as a payment is late.
- Interest on the unpaid balance. Technically, these loans are only interest-free as long as you make your payments on time. If you don’t, then the loan provider will start charging interest and add it to your balance.
- Collections. In the most extreme of circumstances, if you default on the loan, your account will be turned over to a collection agency.
In other words, there are many pitfalls that could turn this simple short-term loan into something that costs way more than it should.
3) Credit Won’t Be Built, but It Can be Damaged
If someone was thinking that they could use a Buy Now, Pay Later loan to build their credit score, this unfortunately won’t be the case.
Your credit score (also called your FICO Score) is comprised of data from your credit history as collected by the three major credit reporting bureaus (TransUnion, Equifax, and Experian). Unlike a credit card or installment loan, Buy Now, Pay Later lenders don’t send all of their data to these agencies. Sadly, you could do a fantastic job of making every payment on time, but it would not help boost your credit score at all.
What’s worse is that the opposite is true. Again, if you miss a payment or default on your loan, then your account will be turned over to a debt collection agency. That will become a major red flag on your credit report, cause your FICO score to drop significantly, and may prevent you from qualifying for future credit cards and loans.
4) You’ll Play by Different Rules
A lot of consumers may not realize this, but they have a lot of protections when it comes to making purchases with a credit card. Under the Fair Credit Billing Act, they have the right to dispute credit card charges if there’s a billing mistake or a quality issue with the product. On top of this, many credit cards want to keep their customers happy, so they’ll give them special benefits like waiving purchases that were the result of identity theft or extending the manufacturer’s warranty.
Buy Now, Pay Later loans, on the other hand, won’t offer any of these privileges. Purchases that are made by mistake or under questionable circumstances will be subject to the lender’s discretion.
5) Your Data Will Be Harvested
Finally, when you create an account with a Buy Now, Pay Later lender and start making purchases, you can assume your information will be shared with third-party affiliates. This is not unlike what other large tech platforms already do and is something we all (unknowingly) agree to when we breeze past the “Terms and Agreement” text during an installation and click Agree.
Think Twice Before Using Buy Now, Pay Later
It can be very tempting to see something that costs $100 and have the option to only pay $20. But that’s exactly what both the merchants and Buy Now, Pay Later lenders want you to do. They’re not necessarily concerned about your personal financial well-being. They just want to increase the checkout amount. Therefore, it’s up to us to be vigilant about how we spend our money.
The best way to do this is to keep a close eye on your spending habits and budget your money accordingly. You can easily do this by using an app like Buxfer. Buxfer lets you set limits for each of your major spending categories, and then monitors your purchases in real-time. When you exceed your budget, they’ll send you a notification and that will help you to keep your finances on track. Click here to find out more about how Buxfer can help your budget.
Featured image credit: Pexels
Buxfer Blog 