The Case Against Using Buy Now, Pay Later Loans for Your Holiday Shopping

Buy now, pay later (BNPL) loans are omnipresent. If you want to buy something, somebody somewhere wants to finance that for you into four easy payments.

And BNPL is going to be huge this holiday season. Experts predict that BNPL loans will drive over $21 billion in consumer spending. Which makes a lot of sense. Many BNPL products promise no interest charges, come with no credit check, and are extremely easy to access. When money's tight during the holidays, being able to only pay 25% of what's owed makes a big difference. 

The problem, however, is that convenience can quickly spiral into overspending. So while you might have a very Merry Christmas, you may also have a very miserable January as you the rest of the bills keep rolling in.

With that in mind, let's examine why BNPL loans can be particularly dangerous during the holidays, how to tell if you can actually afford what you're buying, and alternatives for a BNPL-free holiday.

Why BNPL is so tempting during the holidays

Hand up: I'm a holiday overspender. I admit it. I love giving presents. My only salvation is that I'm fanatical about creating a holiday budget (complete with individual spending limits for every family member, friend, and pet).

But as a self-admitted Big Gifter, the allure of buy now, pay later financing would be deadly for my budget. Here's an example of what I mean:

Let's say I had a holiday budget of $1,000.

The way I do things today is to save money throughout the year and spend it according to my budget.

• Person #1: $300
• Person #2: $250
• Person #3: $250
• Pet #1: $100
• Pet #2: $100

Stuff's expensive, so I may only be able to get a few things before I hit those limits. That's where the temptation of buy now, pay later comes in.

Now, imagine I bought Person #1 a nice sweater. The price is $100. If I pay the full price today, I'll have $200 left to spend on Person #1. But at checkout, I'm offered the opportunity to pay only $25 today.

I know the sweater is $100, but I only spent $25. So now I've got $275 left to spend on Person #1. And you know I'm taking any excuse to buy more presents.

The behavioral concept here is called payment decoupling. We're naturally uncomfortable spending money, but the further the feeling of paying for something gets from the feeling of buying something, the less we feel that discomfort and the more we spend. BNPL amplifies that disconnect. 

This is the fundamental danger of BNPL: smaller payments are nice and can be convenient, but they also create a trap where you spend more than you can really afford. Because in the example, I'll still be paying for that sweater (and a bunch of other presents) well into next year, even though there's no room in my budget for any of it.

Another way to think of it: if you can only afford 25% of something today, can you really afford it at all?

Can you actually afford to buy those presents with a BNPL loan?

Buy now, pay later can, and does, work out totally fine for a lot of consumers. The problem is that the consumers who most need BNPL, are also the ones most likely to struggle paying back their loans and end up on the BNPL treadmill, never fully paying back their old loans.

If money is tight, if you're already juggling multiple BNPL loans, and if you're outspending your means, using another BNPL loan is only going to make the situation worse. If you're on the fence, though, ask yourself the following questions:

• Can I pay the full purchase price today without borrowing?
• Do I know the total amount of my outstanding BNPL payments?
• Can I cover every installment of this and every other BNPL loan without cutting back on necessities?
• Would I be buying this if BNPL weren't available?
• Are these payments going to make life difficult in January?

If the answer to more than one of these question is "no," that's a sign that you may not be able to afford purchasing something with a BNPL loan.

Alternatives to BNPL holiday shopping

Saying "no" to buy now, pay later loans doesn't mean you can't have a holly jolly Christmas and all the rest. You just need to be strategic and mindful with your money and resources. Here are some suggestions.

Create a holiday budget

They really work! Don't limit yourself to just gifts, though. Include decorations, special food, travel, and anything else that's holiday season-specific. Try to be as granular as possible. Set limits in every category, but consider adding a small slush fund to handle any overages.

Need help creating a budget for the holidays and beyond? MMI offers free financial counseling 24/7, online and over the phone. We can help you review your finances and create a plan that fits your life.

Pay with cash or debit

If you can avoid creating debt, do it. Also using cash or drawing down from your checking account helps keep you more accountable. You can see the limit of what's available and how it dwindles with each purchase.

Set family spending limits

Giving is a wondering impulse, but spending more money to keep up with your sister is...less good. The holidays sometimes have a way of ballooning from year to year, as we all feel a need to top ourselves and each other. If you're feeling the strain, you're almost certainly not alone.

Let this be the year where you all mutually decide to pull things back a bit. Inflation is out of control, so you've got a great excuse. It may feel like a tough conversation, but it may also be a very welcome one.

Go handmade and secondhand

If you're crafty, now's the time to show it. Make something new or fix something up. Not good with your hands? Think about creating memorable experiences as gifts. Worry less about buying something expensive and put all your points into "meaningful" this year.

Cash in your rewards and gift cards

Got any unused points, rewards, or gift cards lying around? Tap into them to help offset the cost of gift giving.

Frequently asked questions about buy now, pay later

Does using BNPL affect your credit score?

Depends on the lender. Most buy now, pay later lenders don't report your payment history to credit bureaus. No reporting = no impact on your score.

Many short-term BNPL plans don't require a hard credit inquiry, so applying typically won't lower your credit score. However, some BNPL lenders do report loans and payment activity to credit bureaus, and longer-term installment plans may also involve hard credit checks.

Even when a BNPL provider doesn't routinely report payments, an unpaid balance sent to a collection agency could potentially damage your credit. 

What happens if you miss a BNPL payment?

Missing a BNPL payment can result in late fees, restrictions on future purchases, collection activity, and potentially negative credit consequences. Some BNPL providers charge late fees, while others don't. Depending on the lender, you might also be prevented from making additional purchases until you bring your account current.

If you repeatedly miss payments, the lender may attempt to collect the outstanding balance or transfer the debt to a collection agency. This will almost certainly hurt your credit score. If you're worried about missing a payment, contact your BNPL provider before the due date. Some lenders offer payment extensions or hardship assistance.

Can you have multiple BNPL loans at the same time?

Yes. Many BNPL providers allow consumers to have multiple active loans, although approval depends on the lender's policies, your repayment history, and other eligibility factors. You may also be able to borrow from several BNPL companies simultaneously. However, having multiple BNPL loans can (and will) make budgeting more difficult. Each loan comes with its own payment amount and schedule, and those obligations can add up quickly.  

Is BNPL safer than using a credit card for holiday gifts?

No. Both BNPL loans and credit cards have advantages and disadvantages.

An interest-free BNPL plan may be less expensive than carrying a credit card balance that accrues interest. However, credit cards generally offer stronger, more established federal consumer protections, including the ability to reverse a charge if a transaction is disputed.

Credit cards may also offer rewards, purchase protections, and an opportunity to build credit through responsible use. BNPL loans can be more difficult to manage when you're juggling multiple installment plans.

Some longer-term BNPL loans also charge interest, potentially making them more expensive than advertised pay-in-four offers. For consumers who can pay their credit card balance in full by the due date, using a credit card may provide more flexibility and protections without incurring purchase interest, assuming the card's grace period applies.

Can BNPL payments overdraw your bank account?

Yes. Many BNPL providers automatically withdraw scheduled payments from a linked checking account or debit card. If a payment is withdrawn when your account doesn't have sufficient funds, it could trigger an overdraft fee, depending on your bank's policies and how the transaction is processed.

Some banks may decline the transaction instead, and the BNPL provider may attempt to collect the payment again. This is especially important during the holidays, when consumers may have several automatic payments scheduled close together. To reduce the risk, keep track of all upcoming BNPL withdrawals, monitor your checking account balance, and enable low-balance alerts through your bank.

What happens if you return a gift purchased with BNPL?

Returning a purchase made with BNPL generally follows the retailer's return policy, but receiving a refund and canceling the associated loan aren't always immediate. Typically, the retailer must process the return before the BNPL provider adjusts your remaining balance or issues a refund. Depending on the provider and the timing of the return, you may still be responsible for scheduled payments while the refund is being processed.

For example, if you purchase a $200 gift using four $50 payments and return it after making the first payment, you may need to wait for the retailer and BNPL provider to process the refund before your remaining installments are canceled and your initial payment is refunded. If the retailer issues store credit instead of a refund to the original payment method, you may still owe the BNPL balance.

In other words: Don't stop making payments just because you've returned an item. Confirm that your BNPL provider processed the refund and that you don't owe anything. Otherwise you could be hit with late fees for an item you already returned.

One last word on BNPL

Buy now, pay later doesn't make your Christmas shopping more affordable. It only makes it feel more affordable.

An iPhone 18 Pro is $1,200. Whether you're paying $1,200 today or $300 today (and $300 next month...and $300 the month after that...and $300 the month after that...), the phone costs $1,200 and that's what you'll pay (if not more). If you can't afford $1,200, you can't afford that phone.

Luckily, there are lots of other phones out there and you have lot of other options. But if you're feeling trapped by debt, we can help. MMI offers customized debt solutions to help you save money by combining your unsecured debts into a single, affordable monthly payment.