As the world becomes more digitized, the way we shop and spend money is evolving. One of the latest trends is “buy now, pay later” (BNPL) services, which allow customers to purchase items and pay for them in installments over time. According to a LendingTree survey in 2022, 43% of Americans reported using a BNPL service (up from 31% in 2021). The BNPL trend was on the rise prior to the COVID-19 pandemic and continues to surge. BNPL services generally don’t have annual fees, are easier to qualify for with lower credit scores, and provide a fast-financing option. Often integrated into a checkout process, you can see a comparison of costs between the costs between the zero-interest option vs. how much you’ll pay to spread payments out over a longer period.
The Dangers of BNPL Services
While BNPL services may seem like an easy and convenient way to make purchases, they can also come with some significant dangers that could lead to financial troubles down the line. In this blog post, we’ll discuss some of the dangers of BNPL, and why it’s important to be cautious when using this payment option.
Temptation to Overspend
The primary danger of BNPL services is that they can encourage overspending. When you don’t have to pay for a purchase upfront, it’s easy to get carried away and buy more than you can afford. This overspending can lead to debt accumulation. While it may be tempting to pay for purchases in installments, it’s important to remember that these payments will add up over time. If you’re not careful, you could end up with a lot of debt that will be difficult to pay off in the long run.
Fees and Interest Rates
While many BNPL services offer 0% interest for a pay-in-four (payments) plan, you may be subject to late fees if you miss a payment, and if you choose a monthly payment plan there’s often interest charges associated. According to the same LendingTree study, 42% of BNPL users reported having missed a payment on one of these loans. Payment schedules for these loans can vary, with many pay-in-four plans requiring payments every other week, which may be a surprise if you’re used to paying a monthly credit card bill. Your payments are not consolidated on a single, rolling statement like with a credit card, which means cash outflows may be more sporadic across the month, making it difficult to aggregate how much you’re spending. While the idea of paying for purchases in installments may seem like a good deal, you may end up paying more in fees and interest rates than you would have if you had paid for the purchase upfront.
Possible Impacts on Credit Score
Regulations on BNPL services have not caught up with the prevalence of their use. Some companies do report some loan information to certain credit bureaus, but it is not consistent across providers. So, if you are hoping to boost your credit score by paying on time, you may be disappointed. On the flip side, late or missed payments could be reported and lower your credit score.
Finally, the danger of BNPL services is that they may encourage people to avoid learning important financial skills, such as budgeting and saving. While BNPL services may make it easy to make purchases, they don’t necessarily teach people how to manage their finances responsibly, and it may make it more difficult to keep track of payment obligations after those purchases are made.
While BNPL services seem useful to spread out your costs, they can come with dangerous financial side effects under the flashy marketing. It’s important to be cautious when using this payment option and to avoid overspending, accumulating debt, and missing payments.
Associate Financial Advisor
Commentary: The opinions expressed are those of Alaska Wealth Advisors Investment Team. The opinions referenced are as of the date of publication and are subject to change due to changes in the market or economic conditions and may not necessarily come to pass. Forward looking statements cannot be guaranteed.
Note: This material should not be construed as tax advice. You should always consult with your tax professional with regard to specific tax questions and obligations.
Adviser Disclosure: Alaska Wealth Advisors is an investment adviser registered with the U.S. Securities and Exchange Commission. Registration does not imply a certain level of skill or training. More information about Alaska Wealth Advisors’ investment advisory services can be found in its Form ADV Part 2, which is available upon request.