The True Cost of Buy Now, Pay Later

by Kenneth Medford III
Updated 11/15/23 by Kenneth Medford III

We can go out! We can’t go out. No masks! We need masks again. The only thing that seems to be sticking in this age of frequent change is online shopping. In an attempt to put the battery in the back of shoppers all over the web, the new trend is to allow customers to buy products on the spot and pay for them over time (hence the “buy now, pay later” phrase). So let’s take a deeper look and decide what exactly is the true cost of buy now, pay later.

What is Buy Now Pay Later (BNPL)?

According to the always amazing Investopedia:

“Buy now, pay later plans allow shoppers to pay for purchases in four or more installments, often interest-free. Dubbed BNPL for short, these point-of-sale installment loans have been rising in popularity as people spend more time shopping online.”

Just as the name implies, you purchase your item on the spot (sometimes requiring a down payment depending on the cost) then pay it off over time in installments. The concept is pretty straight forward, but there’s a bit more to pay attention to in between the lines.

The Pros of Easy Pay Programs like Klarna

1. No credit check (most of the time)

The major difference between the BNPL model and having a credit card/taking out a loan is a lack of credit checks. As CNBC puts it in their buy now, pay later article, purchases “can be as low as $10 to $20, or as high as thousands of dollars.” This is a boon for consumers that are either struggling with bad credit or have little to no credit. Now, you too can purchase that Bluetooth headset, TV, or gaming console without worrying about hidden credit numbers controlling your ability to do so. No credit check also means using buy now, pay later won’t affect your credit score.

2. On-time payments may help your credit score

This is one point that makes parsing out the true cost of buy now, pay later kind of difficult. For those BNPL programs that do report to the credit bureaus, making on-time payments can actually give your credit score a little boost. Basically, on a $20 purchase, you can get a few points just for making those $5 payments on-time. This is especially helpful for young credit consumers that want to avoid opening a credit card or taking out a loan, but do want to begin building their credit or practicing paying off a purchase. That said, make sure that you note which services do and which don’t impact your credit. Investopedia notes that “Sezzle, for example, offers a buy now, pay later option that includes credit bureau reporting for consumers who opt into it.” However, “Afterpay, on the other hand, doesn’t report payment history to the credit bureaus at all, so it won’t affect credit scores one way or the other.” If you plan on using BNPL as a strategic credit builder, make sure you double-check that fine print.

3. Interest free options

One of the most attractive aspects of the buy now, pay later model is interest free payments. For those that stick to the 4-6 week pay schedule, there tends to be no interest fee. Unlike credit cards or loans, you simply pay for the cost of the product and that’s that. This lack of interest is a much bigger deal than it may initially seem, as compound interest can leave you paying off more than you intended. But, unfortunately, and once again, only some programs are interest free. Make sure that you know how the BNPL service you’re using handles interest and what their pay schedule is (some have longer terms for larger ticket items). 

The Cons of Buy Now, Pay Later

1. No credit check

No, this isn’t a typo. When looking at the true cost of buy now, pay later, it may be nice to not have your credit checked, but it can let you and other consumers run into budget busting spending.The Seattle Times reports that:

“Studies show buy-now, pay-later often induces people to spend more. Two-thirds of shoppers said they bought more thanks to buy-now, pay-later, and almost half said they wouldn’t have made the purchase if that hadn’t been an option, according to a recent survey by LendingTree.”

But it gets worse. According to the same report, “Among those who have used a buy-now, pay-later app, 62% have done it five times or more, according to LendingTree. And one of the most popular purchases is a designer dud or accessory.”

Track your spending and how you feel about it with transaction swiping, exclusively in the app.

As we spend more time indoors due to the pandemic, we also spend more time online. Unfortunately, this has also given companies and brands ample opportunity to reach us through social media ads and encourage us to buy products we wouldn’t seek out on our own. BNPL services have cashed in on our desire for products we wouldn’t purchase if they required a credit check. There’s little to keep us from spending the hard-earned money we may have been putting in our saving accounts.

2. Missed payments may hurt your credit score

I feel like you’re beginning to see the trend here. 

With four in ten customers who have used BNPL in the last 12 months reportedly struggling to repay, the chances of damaging your credit with a small purchase are pretty high. 

Just like credit cards, paying on time will always benefit you. On the other hand, missing payments can hurt you, too. For those BNPL services that do report to the credit bureaus, missing a payment can have just as much impact as missing a credit payment. Another hidden issue that may arise when you miss payments is being sent to collections, which is not ideal either. Investopedia notes:

“Missing a payment can trigger late fees, and missing multiple payments could result in an account being sent to collections. This is the policy Zip (formerly Quadpay) follows, for example. When an account is transferred to a debt collector, any negative history associated with it, including late or missed payments, can be reported to the credit bureaus. Even if your BNPL lender doesn’t ordinarily report your account activity, the debt collector may.”

You may be able to dodge the first layer of credit reporting, but fall behind on your payments and that second wave will get you. *sigh* I did not mean to make a Covid reference there.

3. Buyer’s Remorse

You’re more likely to grapple with regret and buyer’s remorse with BNPL programs. “A quarter of consumers reported that they regretted using these platforms” with many saying they cannot afford repayments or are spending more than they expected.

4. Less regulation

This financial tech world still has a bit of a wild west feel to it. It takes some time for laws and regulations to catch up with new ways of doing things. As seen in the aforementioned Seattle Times article, there are reported issues with getting full refunds, contacting customer service, and other problems that are generally unacceptable in more established consumer circles. 

“Those who are unhappy with their purchases may run into problems down the road, too. Complaints to the Better Business Bureau and the Consumer Financial Protection Bureau show there are disgruntled customers who tried to make a return and had difficulties getting full refunds, especially if the store issued a credit.

Another common complaint is not getting reimbursed for canceled travel plans that were paid via buy now, pay later. And some fintech companies haven’t built out their customer service units, which can prove to be especially frustrating for consumers.”

A credit card or even PayPal purchase can usually be disputed in minutes, either online or via a phone call, but the BNPL model lacks that level of convenience if something goes awry. 

Our conclusions about Buy Now Pay Later

This is just another drop in the sea of personal responsibility. When assessing the true cost of buy now, pay later, I can’t imagine ever using such a service due to the lack of uniformity in how they operate. If I really needed something that bad that I may not be able to afford on the spot, I would go with my credit card. That way, I have a clearer understanding of the fees and other responsibilities I have towards my debt. I’m also a huge fan of the cash back rewards I get (I was able to get the newest Pokémon game, Pokémon Shield with both expansions without a penny coming out of my pocket). For the younger crowd looking to build credit, I would approach this trend with caution. It can be less forgiving than the established credit card route. 

Keep your eyes and ears open and make sure you track where your money is going and why. Using the app is a solid way to do that and can supplement BNPL services that don’t have payment reminders. Just an idea 🙂

Related Reads:

How to Stop Impulse Spending and Blowing Your Budget

All You Need is a Little Nudge

How to Control Spending

Headshot picture of the writer of this article, Kenneth Medford III, with a muted black and white filter.
Kenneth Medford III

Writer, rhymer, gamer: the easiest way to define the man known as Kenneth Medford. I’m a simple man who loves to learn and loves to help and I wander the digital world trying to find ways to sate my hunger for both. Basically, I’m Galactus but helpful.

Check out my other work here or reach out to me on LinkedIn.

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