“If you use BNPL to strategically avoid interest on credit cards, you’ll save money, simply because you’re nixing finance charges, even though you’re paying for something over time. In fact, about 80 percent of BNPL users perform their transaction with a debit card, to avoid interest.”
I remember growing up and watching my mother put purchases on layaway: jewelry, electronics, clothes for me and my sisters. In many families across America, this was common leading up to the holidays.
Taking layaway’s place, and competing with credit card use, is a more flexible, potentially advantageous payment model called buy now, pay later (BNPL).
With layaway, you receive the purchase once it’s completely paid for. But with buy now, pay later, you’re entering into an installment loan agreement where you take immediate possession of the goods, then pay them off over a scheduled time frame, usually three or four months.
Let’s say you want a nice winter coat that costs $400. You could make an immediate payment of $100, then make three payments of $100 over the next several months. Unlike with credit cards, as long as you pay your BPNL loan agreement on time, there’s typically no fee or interest.
Sounds like a good deal, right? Well, BPNL can be beneficial when used shrewdly. However, there are both pros and cons to this payment method.
As holiday shopping ads fill your TV, inbox, social streams and search results, you’ve been hearing some of the big names in the game such as Affirm and Afterpay. Last year, PayPal debuted its own version of BNPL, a service called Pay in 4, which lets you pay off a balance interest-free in four payments, every two weeks. Other BNPL providers include Klarna, Sezzle, SplitIt, Upgrade and Zip.
About 80 percent of BNPL users perform their transaction with a debit card to avoid interest.
Terms and conditions vary from one buy now, pay later provider to the next, making it crucial to do your homework. For instance, some BNPL companies require you to pay off merchandise in just six weeks; others give you up to 24 or 36 months to pay.
The main benefits: savings, flexibility and convenience.
If you use BNPL to strategically avoid interest on credit cards, you’ll save money, simply because you’re nixing finance charges, even though you’re paying for something over time. In fact, about 80 percent of BNPL users perform their transaction with a debit card to avoid interest.
BNPL gives you added flexibility, too, since it allows you to choose not to pay the full amount for something up front. Being able to keep a chunk of your cash and not fork over the entire price can come in handy, or give you more buying power, especially if you’re paying for big-ticket items like furniture or travel.
It’s also easy and convenient to access a buy now, pay later option. To use a BNPL service, you make purchases right from a BNPL company’s app or directly with any number of merchants you’re already buying from — so it’s a seamless process. It’s an alternative to using credit cards, too, for those who want to avoid extra debt at the cash register, or when shopping online.
First, unlike layaway, it is possible that you could be charged late fees or interest. For instance, one provider of buy now, pay later is a digital banking company called Afterpay. It charges a late fee for missed payments, ranging from $8 to as high as $68, or 25 percent of the total purchase price, whichever is less.
One of the biggest players in the industry, Affirm, does not impose late fees. But with Affirm, the annual percentage rate on your purchases can range anywhere from zero to 30 percent, depending on your credit and the retailer you’re patronizing. (Full disclosure: I own stock in Affirm.)
Affirm, which is the BNPL partner available on Amazon and Walmart, does a soft credit check when you’re at the point of sale and you select the BNPL option. So one other drawback is that not everyone will qualify. You could also potentially ding your credit rating using BNPL, like you can with any type of loan. If you make a late payment or a partial payment, various BNPL companies say they may report you to the credit bureaus, affecting your credit score.
Finally, perhaps the biggest downside is that buy now, pay later may encourage you to overspend.
It’s easy to get caught up in impulse shopping, or spending more than you can afford, if you’re rationalizing a purchase by thinking that you only have to pay a little bit now and can pay the balance later. That mindset can get you in trouble, just like with credit cards. (Research shows that consumers routinely overspend when using credit versus cash.)
The future of paying?
While installment loans have been around for decades at places like furniture stores, this newer form of BNPL has only emerged in the past couple of years. As online shopping has skyrocketed during the coronavirus pandemic, BNPL has also surged in popularity.
Most BNPL companies are financial technology startups, but more established, big-name firms have gotten into the act, too. In September, Mastercard announced plans to roll out a new offering for both in-store and online transactions early next year. Major banks like American Express, Citi and JPMorgan Chase have all recently launched their own BNPL products.
The number of buy now, pay later users is projected to surge 81 percent in 2021, to an estimated 45 million people, up from 25 million in 2020.
Should you do it?
If you do decide to try out a BNPL purchase, use these guidelines:
Evaluate your overall budget first to determine your available monthly cash.
- Set a spending limit for your BNPL purchases and stick to it.
- Consider whether you would spend that much for the item if you had the cash to pay for it at once.
- Ask yourself if the product or service is a need or a want. (If a want, rate it from 1 to 5 — how badly do you want it?)
- Remind yourself of your top money goals for the month, quarter and year.
- Read the fine print to understand fees, interest, payments required and other terms.
- Pay as agreed to avoid unwanted charges.
Make sure you use buy now, pay later wisely to reap its benefits — and not create financial problems for yourself in the future.