Buy Now, Pay Later (BNPL) services have transformed the shopping landscape, allowing consumers to make purchases and pay for them over time. According to a Credit Karma survey from 2021, BNPL is now so popular among American consumers that 42% have used it at least once. While these figures can be tempting, you should weigh the pros and cons to determine if BNPL is a wise financial decision.

Let us explore the benefits and drawbacks of BNPL and whether it is a smart option for you.

Buy Now, Pay Later (BNPL) is a short-term loan, sometimes called a point-of-sale loan. It enables customers to purchase products or services in installments determined by an online app provider or a retailer. Major BNPL providers include Afterpay, Klarna, Affirm, and Sezzle. Customers can choose BNPL at the point of sale thanks to these services’ seamless integration with online businesses.

The typical BNPL process works as follows:

1. Select BNPL at Checkout: Upon checking out, you will get an option to pay later, but you can also utilize a BNPL app or access alternatives through your credit card.

2. Apply For The Finance: If you wish to take advantage of this offer, you must instantly fill out a short application that typically asks for information, such as your name, address, date of birth, email address, and Social Security number.

3. Soft Credit Check: Next, the BNPL vendor may conduct a soft credit check and, in a few minutes, will approve or deny your application. This credit check does not affect your credit score.

4. Payment Schedule: When your application is approved, the purchase will be split up in equal installments, paid over weeks or months.

5. Automatic Deductions: Payments will be deducted automatically from your linked bank account or credit card on the agreed dates.

Divided Payments

The ability to split payments into smaller, more manageable sums is the main advantage of BNPL services. You need not have to have the amount in your pocket on the day of a significant transaction. Also, your account will have the balance required before the next payment if it aligns with your biweekly pay schedule.

Financing at 0%

Generally, you won’t incur interest if you pay your BNPL on schedule. For most buy now, pay later users, the allure of 0% financing is undeniable as it is a better alternative than credit cards with high interest rates.

Instant Product Access

BNPL enables you to purchase goods without paying the entire price upfront. It can be a good option for essential purchases or limited-time offers.

No Credit Check (In Some Cases)

Some BNPL providers do not perform a credit check, making it accessible to those with less-than-perfect credit scores. It can be a way to build credit history for those who have just started.

Easy Budgeting

Splitting payments into manageable installments can help with budgeting and cash flow management. You can plan your finances better without a one-time expense.

Financial Overextension

One of the main risks of using BNPL services is that it is easy to overextend your finances. A recent survey by Credit Karma revealed that 55% of BNPL users spent more than they would have if they had to pay the amount upfront. This figure emphasizes a disadvantage of BNPL services: the tendency for excessive spending. If you account for the cost of each payment, it will not be easy to register the item’s total amount. Bills can accumulate and be challenging to manage if you use buy now, pay later programs for many purchases.

Late Fees and Penalties

Penalties and late fees for missing payments can be very high. The Consumer Financial Protection Bureau reports that consumers using BNPL services can incur additional fees and interest rates ranging from 10% to 30% annually if payments are not on time. These costs can add up quickly, turning what seemed like a good deal into a financial burden.

Impact on Credit Score

Numerous buy-now, pay-later businesses, according to the CFPB, don’t report information to credit reporting agencies. It implies that it’s unlikely for your timely payments to appear on your credit report. It means that you will not be building a credit history.

However, late or missed payments can negatively impact credit scores, making it harder for consumers to access other forms of credit in the future.

Limited Consumer Protections

According to the CFPB, purchases made with BNPL loans do not have the same consumer protections as credit card transactions, such as reimbursement for fraudulent or defective products. You might have to wait weeks or months and possibly go through a challenging process if you have to return a BNPL purchase. Further, to avoid late fines and penalties, you must pay your installments for the time it takes to complete the return if there is a dispute.

Lose Out on Rewards

You will forfeit your rewards and other credit card perks if you usually shop with a credit card and utilize “buy now pay later” for a transaction.

There are ways to use your credit card to pay off your buy now and pay later purchases and accrue points. However, some customers may find it challenging, and if you cannot pay your credit card payment in full, you may wind up paying extra.

Should You Use Buy Now, Pay Later?

Using BNPL depends on your level of responsibility and unique financial situation. Before you commit to a BNPL purchase, consider your ability to pay on time and maintain enough funds in your bank account to prevent overdraft fees during automated payments. Also, if you are covering a percentage of the total upfront, it is crucial to determine whether you can afford the entire amount, given your current financial situation.

Furthermore, BNPL still entails taking on debt, even if your budget allows for the payments. Use it for necessary purchases, like a computer for work or school. It is not a good idea to take on debt for unnecessary purchases.