BNPL offers consumers interest-free financing — but it comes with potential pitfalls. Learn the ways you could err when you sign up for one of these plans.
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One fairly recent phenomenon in the world of money is the rise of buy now, pay later, or BNPL financing. This payment method involves working with a third party (Affirm, Klarna, and Afterpay are some of the bigger names) to make purchases, and then you pay them off over time, usually over a few weeks or months, with no interest and sometimes no credit check.
Sounds easy, right? Well, perhaps not. Here are a few errors to avoid if you sign on the proverbial dotted line to use BNPL.
1. Not reading the fine print
First and foremost, it’s a mistake to assume you know exactly how BNPL works and not actually read how the plan you’ve selected will operate. How often will your payments be due? What happens if you miss a payment or make one late? And what if you have a problem with your purchase? You should be able to answer all of these before committing to a BNPL plan.
BNPL plans vary in how often your payments are due, so you absolutely need to know this before you sign up. And you should know the consequences of late or missed payments (more on these below).
Finally, one area in which BNPL plans can significantly differ from credit cards is purchase protection against untrustworthy merchants. If you buy something from an online store using BNPL and your purchase never arrives, what’s your recourse? You could dispute the charge with the credit card issuer if you used that payment method. Before signing up for a BNPL plan, see what the company’s procedure is for getting your money back.
2. Using BNPL to buy things you can’t afford
To be fair, this is a risk with other payment methods too, most notably credit cards. It’s so easy to spend more on a credit card than you can comfortably afford to pay back in a timely manner, and rack up interest charges in the process. With a BNPL plan, you won’t incur interest, and you can avoid late fees if you make your payments on time, but it’s still not a good idea to use this payment method for anything other than necessary purchases.
Let’s say your laptop dies on you, and you’re a self-employed writer. You’ll need a new one for your livelihood, of course, and using BNPL to make the purchase might be a good idea, provided you can afford the payments over time (and don’t have the money put aside to pay for it in one go). It’s a less-ideal situation to use BNPL to buy clothing, accessories, or electronics for leisure purposes, however. Worst of all, the easy payment terms make it more likely that people will use BNPL for unnecessary purchases.
3. Committing to too many loans at once
BNPL plans have been super easy to come by lately — while they were once common only on the internet, you can now find major in-person retailers offering the ability to make purchases this way. As a result, you might be tempted to sign up for plans to make multiple purchases, which could leave you unsure of how many payments you owe and when they’re due. If you lose track of payment due dates, amounts, and other fine details, that’s a short trip to financial trouble.
4. Making late payments — or missing them altogether
This mistake can be the result of a combination of the mistakes listed above, or it could just be the result of life happening. Sometimes you get busy and you forget that a bill is due, and you end up paying it late, or you remember in time and have to scramble to make that payment. This may be more likely with BNPL, however.
The majority of your regular bills are due monthly — your mortgage payment, electric bill, or credit card likely all require you to send money once a month. But BNPL plans sometimes require weekly or biweekly payments. It can be a lot harder to manage this payment schedule, and if you only get paid once or twice a month, you might find yourself struggling to scrape up the money to make the payments.
And if you pay late or miss payments, you’ll face late fees and possibly even credit score damage. There may have been no credit check when you signed up, but if you stop making payments, you could be turned over to collections, which definitely hits your credit score.
To be clear: buy now, pay later plans aren’t an automatic must-avoid for your personal finances. In fact, there are some perks to using them wisely, including taking advantage of easy no-interest financing. Just be sure to read that fine print, avoid buying items you can’t afford, and mark your calendar for when your payments are due.
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