Updated: Jan 8
If you’ve done any online shopping lately, you’ve likely seen some version of a “Buy Now Pay Later” or “BNPL” app. Some examples are Klarna, Affirm, Afterpay, and PayPal ‘Pay in Four’, although there are many more.
How do they work?
BNPL apps let you make a purchase now and pay over time, most commonly in four installments--generally 25% of the total purchase cost up front, and then another 25% every two weeks. Terms can last as long as a year.
What makes this tempting for consumers?
It’s convenient—instant approval at the checkout!
There’s no interest if you have good credit and make your payments on time.
Some offer a reward for using the first time.
It helps smooth out spending. Think of how much easier it is to fit a large purchase into the budget if you don’t have to pay for it all at once!
What’s the downside?
Great question. If you’re late on a payment, you can expect to get hit with interest up to 29.99% and possibly a late fee. Plus, if your payments are automatically drafted from your account, you could get hit with an insufficient funds charge from your bank as well. And, though on-time payments generally aren’t reported to the credit bureaus, late or missing payments are.
Should you use them?
It depends. Much like many financial products and services, there are benefits for some (*cough, cough* the wealthy) and huge downsides for others (*cough, cough* poor people).
Basically, these services are wonderful for the people who don’t need to use them. Even if you could afford to buy something outright, using a BNPL service lets you hold on to your money a little bit longer, letting it grow before you hand it over. Free financing! No interest, no charges, and you already have amazing credit, so you don’t care if the transactions get reported or not.
What about the people who do need to use them? According to this Forbes article, 31% of BNPL users consider their overall financial situation to be “dire” or “struggling,” and 43% have made a late payment over the past two years. I don’t need to tell you that this….isn’t good. Much like credit cards or payday loans, these services charge high fees and make their money off of those least able to afford it.
These apps can also pose a problem for those with a history of spending issues. If you’ve had problems with overspending in the past, these apps can be very tempting and allow you to easily spend more than you can actually afford. If you can’t afford something now, stop and consider if this item is absolutely necessary before you click on the “pay in four” option at checkout. Do you know with certainty you’ll be able to make the payments? If not, there’s likely a better way to finance it.
The holiday season is here and it's already tempting to overspend. Make a gift-giving budget and stick to it, and be very careful with offers tempting you to spend more than you can afford.