Buy now, pay later might seem like a great way to cover daily expenses and avoid credit card debt or interest charges. But in reality, these schemes can cost you more in the long run due to the true cost of “pay later”. Let’s start with a definition of BNPL: buy now, pay later.
What is buy now, pay later (BNPL)?
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.Investopedia
Here’s why you should avoid using buy now, pay later programs for daily expenses.
1. You could end up paying more for your purchase
With most buy now, pay later schemes, you’re given a grace period to pay off your purchase. You’ll be charged interest on the outstanding balance if you don’t pay it off within that timeframe. If this occurs, you could pay more for your purchase than if you had just used a credit card or taken out a personal loan.
NerdWallet notes that, “While a pay-in-four plan doesn’t usually charge interest, other BNPL plans can charge an annual percentage rate up to 30%. Late fees range from $5 to $10 and are sometimes capped at 25% of the order value, depending on the company.” You know yourself best; consider what the true cost of that buy now, pay later plan might be. The variance in rates and caps from one service to the next can have you paying more money than you ever considered for what was likely a spontaneous purchase. Also, remember that the higher the initial cost, the harder the interest rate will hit (i.e., 30% of a $500 purchase hurts more than 30% of a $100 purchase).
2. You could damage your credit score
If you don’t pay off your balance within the grace period, your late payments will be reported to the credit bureaus. This can damage your credit score, making it harder to get approved for loans or credit cards in the future.
Now, some buy now, pay later platforms claim that they don’t report to the credit bureaus. But, once your account goes to collections, it will ABSOLUTELY get reported. While researching for my previous article on BNPL, I found that “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.” So, while you may initially feel protected from that blowback, it’s still a real and potentially damaging possibility that only adds to the true cost of buy now, pay later plans.
3. You might be tempted to overspend
Buy now, pay later schemes can be tempting for people trying to stick to a budget. If you know you don’t have to pay for your purchase right away, you might be tempted to spend more than you can afford. This can lead to financial problems down the road.
Marshall Lux, via this CNN article, shows how slippery the slope is. “The biggest red flag to Lux, a former chief risk officer for Chase, is what people are buying with these services and how customers can create a revolving cycle of more and more debt.”
“They’re buying cleaning supplies, they’re buying socks, they’re buying sneakers, they’re buying everyday household items,” he said. “When people start revolving everyday purchases like groceries, you know there’s a problem.”
When the consequences of your spending are constantly a day away, your relationship with money changes. It’s much easier to say, “I’ll have it next week” or, “I’ll just work a couple of extra hours,” rather than tell yourself, “I don’t need this right now.”
4. You might end up paying hidden fees
Some BNPL schemes come with hidden fees, such as account-keeping or transaction fees. These can add up, making it even more expensive to use these buy now, pay later programs and increasing their true cost.
Now, that’s not to say that they’re wrong for charging the fees, but as the consumer, you have the added responsibility of looking through the terms of service and understanding what you’re getting yourself into. Trust me; when it comes time to collect, they won’t let you off the hook because you didn’t know something.
5. You might be tempted to use BNPL programs for impulse purchases
Because you don’t have to pay for your purchase right away, you might be tempted to use buy now, pay later schemes for impulse buys. This can lead to buyer’s remorse and financial stress down the road.
Another point I made in my previous article: “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 expected.”
Going through a check-out line at a brick-and-mortar supermarket gets people to make impulse purchases every day by having candy, soda, and magazines in their faces every time they shop. So do the BNPL services. At this point, there are very few, if any, major retailers that don’t offer a multitude of these services at check-out. Be mindful, and don’t let them Jedi mind trick you into throwing your budget away.
If you’re trying to stick to a budget or avoid debt, it’s best to avoid using buy now, pay later schemes. Other options are available that can help you stay on track financially.
You might rely on buy now, pay later payment options to help make ends meet. However, you may not realize that these payments can cost you more in the long run. Here are a few tips to help you avoid using buy now, pay later payments for daily expenses:
1. Make a budget
This may seem like a no-brainer, but knowing how much money you have coming in and going out each month is critical. Once you have a good understanding of your finances, you can start to make changes to ensure that you’re not overspending.
And trust me, I get it. Making a budget can be just about as difficult as sticking to it. It may be cliché, but a budget is like a diet: it’s a lifestyle. You need to have your mind right and truly understand your goals to determine the path you’ll use to get there. Check out this article about money mindfulness. It should demystify some finer points of getting your finances in order.
2. Live within your means
Just because you can afford to make a purchase doesn’t mean you should. And if you can’t afford it? Well, you’ll pay more in the long run if you cannot pay off the total amount within the interest-free period. Discovering the true cost of that “pay later” part might not be enjoyable.
This one is just self-care. Yes, you deserve all the awesome things in life you want, but you might not yet be there financially. Stick to the game plan and play your position. Otherwise, you might bury yourself before seeing the fruits of your labor. Achieving and maintaining financial wellness is a marathon, not a sprint.
3. Use cash instead of credit
Whenever possible, try to use cash instead of credit. This will help you stay within your budget and avoid accruing interest on your purchases.
Another personal trick I utilize is only using my credit card for essentials and daily expenses (food, gas, utilities). I know I need these things, so I might as well get the points for them. For anything else, like a night out with friends or a new game, I purchase outright with cash or debit. It wasn’t meant to be if I don’t have it now.
4. Know the terms of your agreement
Before you sign up for a buy now, play later payment plan, MAKE SURE YOU UNDERSTAND THE TERMS AND CONDITIONS. This includes the interest rate, repayment period, and any fees associated with the BNPL plan.
I cannot stress this enough. These companies want money. Despite what their advertisements may say, they exist to make a profit. If you say later that you didn’t understand how it worked, they will still come to collect their money. Defend yourself and your wallet with knowledge.
5. Shop around for the best deal
There are a variety of buy now, pay later payment options available, so it’s important to shop around for the best deal. Before deciding, consider interest rates, repayment terms, and fees.
Buy now, pay later for daily expenses
Like any other money move, you want the best bang for your buck when it comes to daily expenses. Consider your financial situation and do what works best for you. Take the time to consider what the true cost of a buy now, pay later program might be before agreeing to the terms and conditions.
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.