- Spreading the cost of a purchase over multiple payments without any interest owed is seriously enticing.
- Explosive growth in the use of Buy Now, Pay Later (BNPL) obscures hidden risks and costs.
- While we’re waiting to see if federal regulators will step up oversight of BNPL providers, here’s how to protect yourself from costly BNPL mistakes.
Buy Now Pay Later (BNPL) can seem like a godsend right about now. With prices on just about everything rising sharply, the ability to buy something today—a computer, clothes, airplane tickets, even food—and pay just 25% upfront with the rest due over three more equal payments spread over six weeks has obvious appeal.
Not just for you, but for retailers as well, as BNPL encourages people to spend more money. We’re expected to spend more than $8 billion in BNPL purchases this year, up from around $5 billion last year. It’s becoming rare to land at the online checkout page and not find an offer to spread your payments over four installments. You’ve likely run into these offers from the big third-party BNPL fintechs such as Affirm, Afterpay, Klarna, or via PayPal’s Pay in 4.
The latest sign of BNPL’s growing allure is that Apple recently announced it’s getting into the BNPL business. Beginning later this year, when buying something with Apple Pay, customers will have the option to chunk out their payments in four installments of 25% spread out over six weeks, with a quick click of the Apple Pay Later button. (Some BNPL providers offer various payback timelines that can stretch repayment over months, but the 4-payments in 6-weeks model dominates.)
Ed Mierzwinski, senior director of the federal consumer program at US PIRG, a nonpartisan public interest advocacy group, describes BNPL as the “latest shiny new toy” dreamed up by fintech firms. The fintechs frame BNPL as a way to help cash-strapped shoppers who might not be able to handle paying 100% right at checkout. Moreover, BNPL offers typically don’t charge any interest or fees if the purchase is paid off on time, which is obviously a lot more appealing than the traditional credit card system.
But Mierzwinski says it is an incomplete picture of a system that can be riddled with potential hidden costs. Starting with the fact that BNPL is “trying to get you to buy more stuff,” says Mierzwinski.
It’s pretty much human nature to talk yourself into buying more when the price is magically reduced by 75%. And that’s effectively how BNPL works. You put something that costs $400 in your cart, and then when checking out, if you choose the BNPL option, the cost at the point of sale suddenly drops to $100. Sure, the remaining $300 is due in three more $100 payments made every two weeks. But right at checkout your brain is tripping out that you can get what you want with just $100 upfront.
Meet the Expert
Ed Mierzwinski, senior director of the federal consumer program at US PIRG, a nonpartisan public interest advocacy group.
Afterpay, a large BNPL provider reported in 2021 that the average basket value at checkout increased 17% once its service was added to retailers’ payment options. The system also seems to encourage some people to choose pricey items they wouldn’t otherwise buy. Nearly one in three BNPL users recently surveyed said they spent more than they would have if BNPL wasn’t available.
Moreover, BNPL operators currently fly under the radar of federal consumer-protection regulations.
The upshot of all this is that it’s on you to make sure that if you use BNPL you don’t stumble your way into costly financial mistakes.
Here’s how to up your BNPL game.
Be real: It’s a loan
The marketing minds at BNPL firms would never ever dream of calling BNPL a loan—what a mood killer when you’re in shopping mode—but consumer protection types are not having any of that.
As part of an ongoing inquiry into the BNPL marketplace, the Consumer Financial Protection Bureau (CFPB) recently sought out feedback from policymakers and stakeholders. A comment letter submitted by 19 state attorneys general was clear on this matter: “Regardless of what some BNPL providers and advocates may claim, BNPL financing is credit.”
And like all credit, you need to be careful what you take on.
The good news is that if you make timely payments you won’t owe any interest, and typically no fees with BNPL deals. But there is always an opportunity cost. Every dollar you use to cover a BNPL purchase is a dollar that can’t be used for other financial goals such as saving more and paying down debt.
That’s an argument for reserving BNPL for must-have “needs” rather than as your gateway financing to splurges. When you’re in the midst of checking out, and considering using BNPL, maybe take a few seconds to ask yourself if you would still buy the item if you couldn’t pay it via a short-term loan. Extra credit: Try to imagine it’s a day or two later. Are you still super confident you will be happy you made the BNPL purchase? Nearly 6 in 10 people surveyed last year said they ultimately regretted a BNPL purchase because it was too expensive.
Be your own borrowing cop
A key feature of BNPL is also a potentially worrying factor. A BNPL provider is not required to run a deep credit check to ascertain if you will be a good bet to be able to pay back on time. That can feel like a huge win in the heat of shopping, but take a step back and you might be better able to appreciate potential risks.
There’s plenty to dislike about the credit card industry, but thanks to federal regulation credit card issuers must assess an applicant’s “ability to repay” typically by checking your credit score, and annual income. When you are approved for a credit card, it is going to have a pre-set spending limit. Those guardrails aren’t currently required of BNPL providers.
Rachel Gittleman, financial services outreach manager at the Consumer Federation of America says an added risk is that there is also no system that provides a “holistic” snapshot of all your BNPL transactions across the different providers, and how your aggregate BNPL usage fits into your overall debt payments.
“Because there is no one assessing a consumer’s ability to repay, the concern is that people will take on unmanageable debt burdens,” says Gittleman. A survey earlier this year found that 4 in 10 BNPL users have juggled multiple payments at the same time, and nearly half of those power users said they have missed a payment at least once.
Again, financial self-care is your only help here. Just because you can buy something with BNPL, ask yourself if you really should.
Be aware there’s no federal oversight yet
Gittleman says consumers mistakenly assume that BNPL providers are held to the same disclosure and best practices rules that credit card issuers are. They aren’t, though this is at the heart of what the CFPB is studying.
The CFPB says it has no timeline for if and when it may announce next steps in its BNPL inquiry. The hope among consumer advocates is that BNPL providers are held to the same standards—ability to pay, clear disclosure, dispute resolution—that the credit card industry is. “BNPL can fill a void for certain consumers, they are interest-free credit that when used properly can help,” says Gittleman. “We just want BNPL to have the same protections (for consumers), be regulated, and have the same oversight as other forms of credit.” She notes all of that is “already expected by the consumer.”
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Be ready for BNPL to impact your credit profile
Adding to the wild-west theme of BNPL, there currently is no industry standard for reporting BNPL accounts to the credit bureaus. Some do. Most don’t. But that’s about to change.
Experian, Equifax and TransUnion have all announced they are working on incorporating BNPL transactions into their systems this year. Eventually that will trickle down to impacting your credit scores as well. If you pay on time, BNPL may help you build or rebuild your credit score. Miss payments and you’re likely looking at a credit hit. A recent survey found that more than 1 in 4 people copped to missing a BNPL payment.
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You’re a devoted on-time payer? Fantastic, but you still might run into BNPL fallout. Depending on how the credit bureaus and the credit scoring gods end up treating BNPL usage, it could make it harder to qualify for other types of credit such as car loans and mortgages.
Beware the cost of tripping up.
The promise of interest-free payments doesn’t mean BNPL is always free. In a comments letter to the CFPB, a consortium of nearly 80 policy stakeholders pointed out that many “providers charge fees, including late fees, missed payment fees, account reactivation fees, returned payment fees, and rescheduling fees that are not clearly disclosed.”
You may need to do some digging around a BNPL site to understand the fees you can be on the hook for, as there is no federal regulation akin to the one-page fee disclosure table that credit card issuers must provide when you open an account.
Be careful tracking payment dates
It’s common for BNPL payments to be based on your date of purchase. Two weeks after you buy something with BNPL—and pay the initial 25%—your second payment is due. At the one-month mark payment #3 is due, and at the six week mark you make your fourth and final payment. The fact that each purchase typically has its own payment schedule can make it a whole lot harder to keep up with on-time payments.
That raises the stakes for missing a payment. And can also lead to bank overdrafts—which often carry their own penalty fees—if you don’t have enough cash in your account on a day payment is due.
Be cautious with big ticket purchases
A running theme among consumer complaints is that it can be hard to get a refund for a returned purchase made with BNPL, customer service can be spotty on this front, and if you are arguing with a retailer about a purchase—damaged good for example—don’t expect the BNPL provider to step in and help, which is a service all credit card issuers provide.
For expensive purchases, a credit card might be a safer way to lock in some protections. You may find you’re even able to set up a BNPL-like payment schedule with a credit card. Big card issuers including American Express, and Chase have rolled out new services in the past year that allow qualified card holders to spread payback for a designated purchase over multiple months without paying interest.
That said, there will typically be a monthly fee based on the size of the purchase, and how many months you want to complete payment. For example, American Express estimates that a $1,000 purchase paid off in 6 months with its Plan It program will run up $50 in fees, which works out to 5% of the initial purchase price. Even if you annualize that, it’s a lot less expensive than the average 17% interest rate charged on unpaid credit card balances.