Q&A: Should I Choose to Buy Now, Pay Later?
Q: When shopping online, I often see the option to Buy Now, Pay Later (BNPL). Is this a good idea?
A: The option of paying for your purchase over time can seem attractive, but it’s important to understand how BNPL works and the possible disadvantages
What is buy now, pay later?
BNPL is a financing option that allows you to purchase items immediately while breaking up the cost into smaller, interest-free payments over a set time period. For example, instead of paying $200 upfront for a purchase, you might pay $50 every two weeks through four payments to total $200. Typically, BNPL plans involve no interest as long as payments are made on time, which makes them attractive to those who want to spread out their spending without taking on credit card debt.
What are the advantages of buy now, pay later?
The BNPL option has several advantages:
1. Interest-free payments
Unlike paying with a credit card, which would mean paying interest on the purchase unless it’s paid off before the bill is due, BNPL is an interest-free payment structure, as long as you stick to the payment plan. This can be especially appealing for shoppers who want to avoid interest charges on larger purchases.
2. Budget-friendly flexibility
BNPL provides flexibility, making expensive items more accessible to consumers who might not have the cash to pay for them upfront. If you’re looking to make a large purchase, spreading out the cost over several weeks or months can be a helpful way to manage your budget.
3. No credit check
Many BNPL services do not require a credit check for approval, which can be a relief for those with less-than-perfect credit or for those who want to avoid a hard inquiry that could lower their credit score.
4. Convenience
BNPL services, like Afterpay, Klarna and Affirm, are integrated into many popular retail websites. There’s no need for a lengthy application process, and your approval decision is usually instant.
What are the disadvantages of buy now, pay later?
The BNPL payment model is not without disadvantages. Some of these include:
1. Encourages impulse spending
Choosing the BNPL option may be convenient, but it can be an easy way to fall into the trap of overspending. Knowing that you don’t have to pay for the full amount immediately can tempt you into making purchases you might otherwise avoid.
2. Late fees and penalties
While BNPL is typically interest-free, many of these services charge fees for late or missed payments, which can add up and make the total cost of your purchase significantly higher than expected. Some services may also report late payments to credit bureaus, potentially damaging your credit score.
3. No credit building
Unlike credit cards, which report to credit bureaus and can help you build credit when managed responsibly, BNPL services generally do not contribute to credit building. Even though using BNPL doesn’t impact your credit score directly, it also doesn’t help you improve your credit profile, which can be a drawback for consumers who are looking to build or maintain a good credit history.
4. Limited purchase protection
Credit cards often come with purchase protections, such as extended warranties, fraud protection and dispute resolution if something goes wrong with your purchase. With BNPL, these protections are either very limited or nonexistent, leaving you with fewer safeguards if a product is faulty or if there’s an issue with the retailer.
5. Potential debt accumulation
While BNPL is marketed as a low-risk way to make purchases, it can still lead to debt accumulation if not managed carefully. The ease of splitting payments might encourage shoppers to take on multiple BNPL plans simultaneously, which can lead to budgeting challenges down the line. Having several BNPL payments due at once, especially if they overlap with other financial commitments, can create a financial strain that feels overwhelming.
When should I choose buy now, pay later?
While choosing BNPL can often be a path toward overspending and debt, it can be a helpful tool if you’re making a planned, necessary purchase and you’ve already budgeted for the payments. Additionally, BNPL can be useful if you need something immediately (like an emergency purchase) but can’t pay for it right now. Finally, if an item you plan to buy within the next few months is temporarily discounted before you’ve fully saved up for it, it can be worthwhile to buy it now and pay it off, thus saving on the overall purchase price. However, before you choose BNPL for any reason, be sure you can easily pay off the balance within the agreed timeframe.
When should I avoid buy now, pay later?
On the flip side, it’s best to avoid BNPL if you’re prone to impulse purchases or if you’re already carrying debt. BNPL can give the illusion that you can afford something when, in reality, it may stretch your budget too thin. If you struggle with managing payments or keeping track of bills, the risk of late fees and penalties likely outweighs the benefits of spreading out payments.
Buy now, pay later offers a flexible and convenient way to manage purchases, especially when money’s tight. However, like any financial tool, it’s important to use it wisely. Use our guide to learn about BNPL so you can make an informed decision before choosing this payment option.