Watch Out for Buy Now Pay Later Offers

By Bob Peters || May 8, 2023

Buy Now, Pay Later is expensive and could get you deep into the debt hole

Buy now, pay later credit sounds like a great deal, right? You get to enjoy your purchase right away, and pay for it in small, manageable installments over time. What could possibly go wrong? Well, a lot actually. Here are some of the main reasons why you should avoid this type of credit like the plague.

First of all, buy now, pay later credit is not free money.  It’s a loan that may very well be subject to high rates of interest and fees. If you miss a payment or default on your loan, you could end up paying much more than the original price of your purchase. You could also damage your credit score, which could affect your ability to borrow money in the future. Second, buy now, pay later credit can encourage you to spend more than you can afford. It can make you buy things that you don’t really need or want, just because they seem affordable at the moment. But remember, you still have to pay for them eventually. And if you have multiple buy now, pay later loans, you could end up in a debt spiral that is hard to get out of.

Buy Now, Pay Later (BNPL) is a form of credit that allows consumers to purchase products online and pay for them in installments over a period of time, usually without interest or fees. BNPL services are offered by fintech companies that partner with online retailers and charge them a fee for each transaction. BNPL services are popular among young consumers who want to buy products without paying the full price upfront or using traditional credit cards.

Not a Free Lunch

However, BNPL is not a free lunch. There are several reasons why you should consider avoiding using this form of credit and be aware of the risks and costs involved.

First, BNPL can encourage overspending and impulse buying. You may be tempted to buy more products than they need or can afford because you only have to pay a small amount at the time of purchase. This can lead to accumulating debt and financial stress in the long run.  Spending more than you earn is a sure way to financial stress.

Second, BNPL can affect your credit score and borrowing capacity. Some BNPL providers report your payment history to credit bureaus, which can impact your credit ratings positively or negatively depending on your repayment behavior. Other BNPL providers do not report to credit bureaus, but may conduct a hard credit check when you sign up for their service, which can lower your credit score temporarily. Moreover, some lenders may consider BNPL debt as a liability when assessing your eligibility for other forms of credit, such as mortgages or personal loans.

Third, BNPL can expose you to hidden fees and penalties. Although many BNPL services do not charge interest or fees upfront, they may impose late fees, missed payment fees, account fees, or other charges if you fail to pay on time or according to the agreed terms. These fees can add up quickly and make the cost of borrowing much higher than expected.

When we look a little closer

When we look a little closer we see some examples of retailers that use BNPL to entice consumers to make purchases:

– ASOS: ASOS is an online fashion retailer that offers BNPL through Klarna, one of the largest BNPL providers in the world. You can choose to pay in 4 interest-free installments or pay 30 days after delivery with no fees. However, if you miss a payment plan on being charged a late fee of up to $7 per installment.

– Walmart: Walmart is a retail giant that offers BNPL through Affirm, another major BNPL provider in the US. Consumers can choose to pay in 3, 6, or 12 monthly installments with interest rates ranging from 0% to 30% APR depending on their creditworthiness and the amount of purchase. However, if they miss a payment, they will be charged a late fee of up to $15 per month.

– Sephora: Sephora is a beauty retailer (I know this because I have a daughter) that offers BNPL through Afterpay, another popular BNPL provider in the US. You can choose to pay in 4 interest-free installments every two weeks with no fees. However, if you miss a payment, you will be charged a late fee of $8 per installment.

The true cost of BNPL can be very high if you do not pay attention to the terms and conditions of the service and your own financial situation. For example, if you buy a $200 product from ASOS using Klarna and pays in 4 installments, but you miss the first two payments due to insufficient funds in your bank account, you will end up paying $214 ($200 + $7 x 2) for the product plus any overdraft fees from the bank which averages around $24 for each item that is overdrawn. If you buy the same product from Walmart using Affirm and pay in 12 installments with a 30% APR interest rate, but you miss one payment due to forgetting the due date, you will end up paying $246 ($200 + $23 interest + $15 late fee) for the product plus any impact on your credit score. If you buy the same product from Sephora using Afterpay and pay in 4 installments, but you miss all four payments due to losing their job, you will end up paying $232 ($200 + $8 x 4) for the product plus any collection actions from Afterpay.

Falling behind

As mentioned, one of the main risks of BNPL is falling behind on payments and facing late fees or other penalties. According to a Credit Karma survey, nearly 34% of consumers who have used BNPL have missed at least one payment. The CFPB also found that 18% of BNPL borrowers had at least one reported delinquency in another account, compared to 7% of non-borrowers. 

Short term Dopamine can lead to overconsuming 

BNPL services encourage impulse buying …remember Brian Portnay’s Experienced Happiness, Daniel Kahneman’s System 1 Fast brain and the Dalai Lama’s Satisfaction.  Impulse buying provides a short term dopamine hit to the brain but the pleasure is short lived while the pain of overconsuming can be long lasting.  The CFPB reported that BNPL borrowers spent 81% more on average per transaction than non-borrowers. Moreover, BNPL services may collect and use your data to deploy models, product features, and marketing campaigns that are targeted based on your preferences and behavior. This may create a cycle of debt and dependency if you were to rely on BNPL to finance your purchases.