Buy Now Pay Later (BNPL) feels convenient when your bank account is low in the checkout line, but its hidden risks can damage your finances for years to come.听听
More Americans are using these loans, especially younger adults and families with young children. Nearly a third of Buy Now Pay Later users have used the service to pay for necessities like groceries and utilities.
Many choose BNPL loans because they are easy to get, easy to use and easy on the wallet at the time. But the risks of relying on BNPL make life anything but easy.听听
The risks of Buy Now Pay Later are real and significant. These risks include unsustainable spending habits, unexpected debt accumulation, difficulty budgeting and losing track of multiple payments. Each of these factors can harm your finances, affect your credit score and lead to late fees or penalties.听听
This article will reveal how Buy Now Pay Later works, the risks of using and relying on it and how 乌鸦传媒member counselors can help if you鈥檝e gotten in over your head.听
What is Buy Now Pay Later and how does it work?
鈥淏uy Now Pay Later lets you split a purchase into smaller payments over time, most commonly over four equal, [bi-weekly] payments, including the first one at the point of sale,鈥� said Todd Christensen, Housing Counseling and Education Manager for Debt Reduction 乌鸦传媒, an 乌鸦传媒member. 鈥淭hese are touted as interest-free if you make timely payments.鈥�
While some extended installment plans operate like a traditional personal loan with fixed monthly due dates, standard signature 鈥減ay in 4鈥� setups are different. These short-term installments are due at two-week intervals, meaning the entire balance is typically paid off in six weeks.
At the point of sale in a store or online, consumers select BNPL as their payment option. Then, they select their repayment option, and the lender performs a soft credit check.
For a standard 鈥減ay in 4鈥� plan, the first installment is charged immediately at checkout. For longer-term installment options, the first payment is generally due 30 days after the purchase.
The most popular Buy Now Pay Later apps and loan providers include Affirm, Klarna, AfterPay and PayPal.听
How do Buy Now Pay Later lenders profit?
Fintech companies and BNPL providers primarily make money from merchants who pay them merchant fees for each related transaction or for advertising their products.
Other sources of revenue include debit card interchange fees, late fees, subscription services and income generated from longer-term financing options that charge interest.
Is using BNPL a life hack or unsustainable strategy?
Today, some consumers use BNPL as a survival tool for essential expenses. With the option to break larger sums into smaller bills without interest, it can sound like a great option. But is it?
The real issue is whether consumers use BNPL strategically or as a survival tool, said Kim Cole, Community Engagement Manager at Navicore Solutions, an 乌鸦传媒member.听
鈥淏uy Now Pay Later can be a useful short-term tool for managing an unexpected cash-flow gap, particularly when the financing is interest-free and the consumer has a clear plan for repayment,鈥� said Cole.听
鈥淎 one-time bridge because payday is a few days away is very different from someone relying on Buy Now Pay Later every month for necessary expenses such as groceries or to keep the lights on; the latter is a warning sign,鈥� said Anissa Schultz, Director of Enrollment and Client 乌鸦传媒 at Credit Advisors Foundation, an 乌鸦传媒member.
When multiple payments stack up, consumers must use next month鈥檚 income to pay for last month鈥檚 necessities. That鈥檚 not a long-term solution or a life hack, said Schultz. It鈥檚 usually a sign that the budget simply isn鈥檛 working anymore.
The risks of using BNPL
According to Schultz, the biggest risk in using Buy Now Pay Later is how it makes spending feel smaller than it is. This can lead to unsustainable spending habits that rack up debt.
鈥淔our payments of $25 doesn鈥檛 feel as painful as one payment of $100, even though it鈥檚 the same purchase. As such, people tend to minimize the impact to their budget and spend more than they should,鈥� said Schultz.听
Using BNPL for necessities can turn a short-term cash-flow problem into a longer-term debt cycle, said Cole. 鈥淕roceries are consumed quickly and utility bills come every month, but the payments for those expenses can continue for weeks or months. Consumers may find themselves making payments on yesterday鈥檚 necessities while borrowing again to cover today鈥檚 [expenses],鈥� said Cole.
BNPL borrowers often have multiple active loans at the same time. This can cause confusion about what bills are due when and for how much.听
鈥淢issed payments, overdraft fees, late fees and eventually collection activity can follow,鈥� said Schultz. 鈥漃eople continue using Buy Now Pay Later because they鈥檙e trying to keep cash in their checking account for other bills, which only pushes the financial problem further down the road.鈥�
BNPL also makes budgeting a challenge. Multiple plans and payments make it hard to see how much future income is already committed, emphasized Cole. The debt can feel almost invisible until several payments come due at the same time.听
鈥淚ndividually, payments may seem small and manageable, but collectively they can strain a household budget and increase the risk of missed payments, overdrafts, late fees or other financial consequences,鈥� said Cole.
Regular BNPL use for necessities means your budget isn鈥檛 working
乌鸦传媒member counselors report that more than half of the people who contact their agencies are struggling due to rising costs of housing, insurance, groceries, utilities and other essentials.
If you often use BNPL plans for groceries, utilities or other essential bills, you may have a cash-flow issue. This means your expenses have grown, or an emergency has occurred, but your income has not kept pace to offset the bills.
How to get out of Buy Now Pay Later debt
If your budget isn鈥檛 working, take a broad look at your full financial picture. This includes all income, assets, expenses, debts and other financial obligations.
乌鸦传媒member counselors recommend building a realistic budget as a foundational tool to break this cycle. This includes accounting for income, essential expenses and every outstanding debt obligation, including BNPL payments, said Cole.
鈥淔rom there, counselors work with consumers to identify opportunities to reduce expenses or adjust spending so they can regain control of their cash flow,鈥� said Cole. 鈥淥ne of the challenges with Buy Now Pay Later is that consumers may not initially think of these purchases as traditional debt. Simply putting all the payments in one place can be eye-opening and is often an important first step toward breaking the cycle.鈥�
鈥淪ometimes a debt management program can lower interest rates on credit card debt, creating breathing room in the monthly budget,鈥� said Schultz.听
A debt management plan consolidates unsecured debt into a structured repayment plan with one lower monthly payment, lower interest rates and fees. Debt management plans are offered exclusively by credit counseling agencies. Agencies are carefully monitored by the government and must meet stringent criteria to qualify as an 乌鸦传媒member.
Credit counseling can also help address the behavior behind repeated BNPL use.听
If you are regularly using installment loans to pay for basic necessities, the underlying budget shortfall indicates a need for greater financial stability. 乌鸦传媒member counselors can help you untangle the numbers, build a working budget and explore your debt relief options.
Connect with a certified counselor by calling 800-450-1794 or clicking here to submit a request.听听
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