The Truth Behind "Buy Now, Pay Later"
If you’ve bought anything online in the last year—or last week—you may have noticed the option to use a “Buy Now, Pay Later” (BNPL) service such as Klarna, Affirm, Afterpay, or other, when you went to checkout. These services offer the buyer the opportunity to make purchases in installments as opposed to paying in full with a debit or credit card. While it sounds appealing to pay less upfront, these kinds of installment plans may penalize users and cause problems down the road.
Users May Acquire More Debt
By breaking up a purchase into smaller payments, it makes it easier for individuals to overspend and create new or additional debts. While often described as “installments” or “payment plans” a BNPL is essentially a loan. Because BNPL plans are so easy to acquire, users run the risk of holding multiple plans at once, accidentally burying themselves in debt. While most BNPL services do not charge interest as part of the plan, they typically charge late fees for missed payments, making the original purchase even more expensive.
BNPLs Do Not Provide Purchase Protections
Unlike the regular protections of a credit card, BNPLs can be difficult to work with if the user needs to return an item or get a refund. Typically, with a credit card, a return is handled by a simple reimbursement to the account from the seller. With a BNPL, the user may need to work directly with the BNPL service provider whose conditions may vary from the seller, making returns more complicated.
Frequent BNPL Usage Can Impact Credit
While BNPL services position themselves as an alternative to credit cards, they can increase the perception of credit risk for financial institutions. BNPL providers have been largely unregulated, resulting in a lack of transparency in credit reporting. Going forward, BNPL data will be more consistently included in credit reports from the three main credit bureaus, Experian, Equifax, and TransUnion. This means even when paid off and on time, finishing a BNPL payment may affect an individual’s overall credit score.
Also, if a user fails to pay a BNPL loan, the debt can be sent to a collection agency, which is reported to credit bureaus, negatively impacting the user’s credit score.
Some financial institutions become wary as they see repeated BNPL transactions on a client’s account. Frequent use of BNPL—even with on-time payments—is often treated as risky because it is hard to tell whether a client is using the loans responsibly. Engaging in this kind of risk can affect eligibility for home or auto loans in the future.
To help manage your credit and be in control of your financial wellbeing, it is recommended to avoid using “Buy Now, Pay Later” services, especially for small or impulse purchases. Even small payments can add up over time. Sound advice is to save, plan, and budget for expenses as best you can. The experts at The National Bank of Indianapolis can help you assess your needs, develop a personalized plan, and meet your financial goals.