242- Buy Now, Pay Later – Is It Right for You?
Have you used the new Buy Now, Pay Later Plans (BNPL) to purchase something you really wanted, such as some new tech or clothing, other than sweatpants, for what was supposed to be your return to the office? Well, according to a February 8th post on Credit Karma, you joined about 40% of Americans using this new form of borrowing with apps from new fintech companies like Affirm, Afterpay, Klarna and Sezzle. In this post, I will highlight some positives and negatives of this growing source of credit.
What is BNPL?
BNPL is new form of credit that allows you the option to split what they owe into smaller, equal payments spread out over the course of a few weeks or months, often without interest. It was developed to offer consumers with a new way to make purchases without having to add to their outstanding interest accruing credit card balances. Stores and companies pay the BNPL provider fees for this service that in most cases are in excess of what credit card companies charge them. They do this because it offers consumers a new convenience.
Products that are eligible for BNPL use range in price from less than $100 to several thousand dollars. When you’re buying one of these products using BNPL, you will select that option at checkout online or in an app. If approved, the purchase is sent to you and the cost is split into a payment schedule — typically four fixed payments made bi-weekly or monthly until the balance is paid in full. Approval takes only a few minutes.
Key Takeaways About BNPL Plans
Here are some key takeaways that you should understand about these plans:
Unlike credit card companies or other consumer loan lenders, BNPL companies generally don’t conduct a “hard” credit card inquiry that could impact your credit scores when you apply. Instead, most BNPL providers only require that you be of certain age (e.g., 18 or older), have a mobile phone number, have an existing debit or credit card and can confirm your identity.
Consumers need to make sure they keep track of their BNPL purchases or they will find themselves overextended. As easy as BNPL makes paying for a purchase consumers should always make sure they’ll be able to afford whatever it is they’re trying to buy. Another common-sense question to consider: Is this item a necessity? If it is, then a BNPL might give you the flexibility to make a purchase you need sooner than you’d otherwise be able to save for. If it’s something you want instead of need, consider waiting to buy until you’ve saved up for it.
It’s important to know that most BNPL credit is not reported to the credit bureaus and won’t impact your credit score but that some do. If getting or building credit is your goal some BNPL plans will not help you develop the payment histories, you desire.
For those BNPL plans that report to the credit bureaus if you make a late payment, and the BNPL company reports your late payment to a credit reporting company, this can harm your credit history. Be sure to research whether or not a BNPL company reports to credit bureaus before using their service.
While many BNPL companies don’t charge interest, many will charge late fees if you miss a payment and will use collection agencies if you don’t repay the credit extended. Be sure to carefully review the BNPL terms and conditions to understand your obligations.
BNPL products usually don’t have the same consumer protections as other types of credit that you are used to with credit cards. For example, a BNPL company may hold you responsible for the total cost of a purchase even after you’ve returned the product, so be sure to read and understand the merchant’s specific return policies.
Always compare BNPL to other payment options. Stores may times offer other credit options to finance your purchases. Carefully consider which option is best for you, including your credit scores.
If you use BNPL please use calendar reminders or bank autopay capabilities to avoid missed payments and late fees.
Please go to the Consumer Financial Protection Bureau’s website for a complete discussion of this subject. It has created a great resource for you to read and consider.
Buy Now, Pay Later is a new form of easy to qualify for credit brought to you by the new fintech apps. Like any other form of debt, you need to use it for good reasons (buying new tech for work or a side gig) versus for funding your normal living expenses. The choice is up to you. More and more tempting options are becoming available for us to use to buy things. Just be sure they are things you really need and not just what you want.