4 Little-Known Risks of ‘Buy Now, Pay Later’

A parent teaches their child about credit cards through buying something online.

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If you’re thinking of using buy now, pay later, make sure you know about the risks involved.

Key points

  • Buy now, pay later (BNPL) apps make it easy to finance purchases, and they usually have zero-interest offers.
  • These may charge deferred interest, though, if you don’t pay off your full balance within a certain time period.
  • They also don’t help your credit score or have the protections that credit cards offer, and they encourage overspending.

Shoppers don’t always have enough saved to cover big-ticket purchases, like a new mattress or computer. But there’s a good chance you could spread out the cost over time using buy now, pay later (BNPL).

Many major retailers have partnered with BNPL services, and these have become popular with consumers for a few key reasons. They normally don’t charge any interest if you pay off your balance within a certain time period. They’re also easy to use and have a quick application process.

However, there are some potentially costly drawbacks to BNPL, and a lot of users don’t know about them. Before you try one, it’s important to be aware of these little-known risks.

1. You could be charged deferred interest

The best part about BNPL is that you can finance a purchase without paying any interest, but there’s sometimes a catch. This may be a deferred interest plan, meaning the interest is only deferred for an introductory period.

If you pay off the balance within that introductory period, then you don’t get charged interest. But if there’s any balance left over, even $1, you can be charged interest on the original amount of the purchase. If you paid for a $500 purchase with a deferred interest plan, you’d be charged interest on the full $500, regardless of how much you had paid down that balance.

To spot these types of BNPL plans, look for language like “no interest if paid in full within six months.” That usually indicates that you’ll be charged deferred interest if you don’t pay in full. You can also find out if a BNPL service is offering deferred interest by checking the terms and conditions.

2. It won’t help your credit — but it can hurt your credit

This is a double whammy. Most BNPL services don’t report the payments you make to the credit bureaus. Any on-time payments you make won’t improve your credit score. That’s a disadvantage compared to credit cards, since credit card payments do help your credit.

Some BNPL companies may, however, report late payments. The payment needs to be at least 30 days late to go on your credit file. So, you have some margin for error, although you could be charged a late fee as soon as you miss a payment. And just a single late payment on your credit history can decrease your credit score by over 100 points.

Even if a BNPL doesn’t report late payments, they could send your account to collections if you don’t make a payment for several months. Collections activity almost always ends up on your credit history and has a significant impact on your credit score.

3. It encourages overspending

The appeal of BNPL apps is that they break down big, daunting purchases into smaller, bite-sized payments. It’s easier to talk yourself into paying $75 per month than parting with $300 all at once.

That’s also why BNPL can be so dangerous. These services make expensive items look much more affordable, even though the total price is still the same. There are a couple of common traps people fall into:

  • They make too many purchases with BNPL. It might seem reasonable to always choose smaller payments. But you could end up with lots of extra bills this way if you take on payment plans for several items.
  • They convince themselves to make a big purchase because of BNPL. For example, maybe you normally wouldn’t get a $3,000 jacket, until you see that you could pay for it in 24 monthly payments of $125. This is how BNPL apps can convince you to spend a lot more money than usual.

4. It doesn’t have the same protections as credit cards

One of the reasons why it’s usually good to pay with credit cards is because of the protections you get. The Fair Credit Billing Act entitles you to dispute credit card charges if there’s a quality issue or a billing error. BNPL plans don’t qualify for this, although providers may have their own dispute process.

Many top credit cards also offer complimentary extra protections on purchases you make. Once again, you don’t get this if you use BNPL. These protections can include:

  • Purchase protection against damage or theft
  • Extended warranty coverage
  • Return protection

None of this is to say you should never use BNPL. There are some situations where this type of payment plan could be your best option. Just make sure you’re aware of the risks they carry.

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