Are Buy Now, Pay Later Loans Safe to Use?

It's a pretty common experience these days: you hit the virtual checkout of your online retailer of choice looking to buy a ceiling fan or a nightstand or a nice pair of joggers and you're presented with a choice – would you like to pay the full amount today, or pay some of it today and the rest of it later?

And that's the buy now, pay later (BNPL) experience. While technically any credit or loan product could be considered "buy now, pay later", the growing BNPL market is a relatively new and very tech-forward version of making purchases on credit. It's extremely easy to access, breaks large payments into more manageable chunks, and often promises no interest and no fees. Pretty win-win, right?

In reality, just like any credit product, BNPL loans are perfectly fine when used responsibly. The key is making sure that you're using them safely and not creating expensive problems for future you. 

What is buy now, pay later?

Buy now, pay later loans are a type of short-term financing that allows consumers to make purchases and pay for them at a future date, often without interest if payments are made on time. BNPL is commonly offered at the point of sale by retailers, both online and in physical stores, through various financial service providers.

Some of the biggest providers of buy now, pay later loans are:

• Affirm (partners with Amazon and Walmart)
• Klarna (partners with Etsy and Macy's) 
• PayPal (partners with Best Buy and Home Depot)
• Afterpay (partners with Gap and Nordstroms)
• Apple Pay Later (available anywhere Apple Pay accepted, up to $1,000)

How does buy now, pay later work?

BNPL typically works like a small, short-term loan. At the point of sale, when you're ready to make your payment, you're presented with the option to buy now and pay later. The purchase price is usually evenly divided into a small number of payments, most often four. So a $200 purchase becomes a $50 payment at checkout, with three additional $50 payments soon to come.

The payment schedule can vary depending on the provider and the purchase. It may be monthly payments, it may be bi-weekly payments, and it may be something else entirely. The schedule should be clearly spelled out as part of the BNPL offer.

If you decide to use BNPL you'll likely need to complete a short application. Every provider has a different process and different requirements. Be prepared to provide your name, address, phone number, email address, date of birth, and Social Security number. A credit check may or may not be required, although these credit pulls are almost always soft pulls and should have no impact on your score. 

Most importantly, you'll need to provide a payment method, like a credit card or debit card. Your payments, once approved, will be charged automatically as scheduled.

What are the risks of using a buy now, pay later loan?

Like any credit product, buy now, pay later isn't without its share of risks, though some are more concerning than others.

Opportunity to overspend

Buy now, pay later is, at it's heart, just another way to spend money you may not actually have. By allowing you to only pay a quarter (or less) of what's owed and finance the rest, BNPL shifts the majority of the expense to a later date. That can be good if you're in-between paychecks, but what if that paycheck isn't enough to cover what's due? Or what if an unexpected cost eats up the money you had earmarked for your BNPL payments?

Anytime you spend money you don't have you're taking on risk. Sometimes that risk is reasonable and justified (most people can't pay cash for a house, for example), but sometimes it's just unnecessary risk. In other words, BNPL is a form of debt, and it's always better to avoid creating debt whenever possible.

Added costs from fees and interest

Many BNPL plans promise no fees and no interest charges, but if there were never any fees or charges there really wouldn't be much incentive to offer these kinds of services.

In reality, the no interest plans are usually reserved for the shortest term BNPL plans. A four payment, bi-weekly plan will often come with no interest charges, for example. But what if you can't pay everything in six weeks? Many BNPL providers also offer longer term plans, with some offering terms as long as 60 months. These types of plans are much more likely to come with interest charges, which be may as high as 36% annually.

So while the ideal version of a BNPL transaction doesn't cost you much more than the original purchase price, there are many scenarios where you may end up paying way more than the sticker price thanks to years of interest charges. 

Less protections than other credit products

This is changing thanks to new rules established by the Consumer Financial Protection Bureau (CFPB), but it's important to keep in mind that buy now, pay later loans aren't currently regulated the same as credit cards and unsecured personal loans.

Some of the perks of using a credit card to make purchases don't currently apply to BNPL purchases, including rules regarding how refunds and merchant disputes are handled. BNPL providers also may or may not report to credit bureaus, which means that repaying a BNPL loan successfully may not help your credit at all.

As noted, the CFPB is trying to ensure that buy now, pay later users get the same protections as traditional credit users, but there is the possibility that BNPL providers may sue to have these new rules overturned.

Easy to abuse

Who's most likely to use buy now, pay later?

• Someone who can't afford to pay the full purchase price immediately.
• Someone who may not have access to a credit card.
• Someone who may have damaged credit.
• Someone who may be struggling to balance their monthly budget.

BNPL is attractive precisely because it's easy to access and helps you make purchases immediately even if you only have a fraction of the purchase price available. The type of consumer who's most likely to use BNPL is also the type most likely to struggle to make those payments. And once you start struggling to make the payments, the potential fees and charges just make your budget that much tighter. 

As a result, similar to payday loans, once you start using BNPL it may be hard to stop.

When is it safe to use buy now, pay later?

When used as advertised, buy now, pay later isn't inherently anymore risky than most credit products. The biggest risk is always the possibility of spending more than you can afford and getting trapped in a debt cycle where fees and interest charges make it nearly impossible to pay off your debts in full.

When considering whether or not to use buy now, pay later, ask yourself the following:

• Can I afford to pay this in full? If you can, do. Even if the offer comes with 0% interest, if you can avoid the risk of taking on debt, do that instead.
• Can I wait until I'm able to pay this in full? Instant gratification is great and all, but if you can wait a month and buy that air fryer without going into debt, that's the way to go. That said, sometimes you can't wait. If the purchase supports an important need, it may be better to buy now and...well, you know how it goes.
• Will I be able to afford these payments? This is the most important question of all. No interest and no fees doesn't really matter if you won't be able to afford the payments when they come due. Be honest with yourself and your budget, and walk away if you simply can't afford it.

Buy now, pay later can be a useful financial tool under the right circumstances, but if you find yourself using BNPL repeatedly that may be a sign that your finances are in trouble. Even if you feel like you can manage the juggling act, consider connecting with an expert and getting an unbiased view of your finances.

MMI offers free financial counseling 24/7, online and over the phone. We can walk through your spending, review your debts, and help you create a plan that lets you breathe easier each month.