If you do a lot of shopping online, you have probably seen buy now, pay later options. But what is involved in these options? Do they have a positive or negative impact on your wallet and your fiscal health? Let’s discuss.
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What is Buy Now, Pay Later?
Buy now, pay later (often abbreviated as BNPL) is defined by Investopedia as “a type of short-term financing that allows consumers to make purchases and pay for them over time, usually with no interest”. So instead of spending two-hundred dollars all at once, you have an option to break that two-hundred dollars into smaller, more manageable chunks. The smaller chunks can vary based on the provider of the service, but it often is divided into four. For our example of a two-hundred dollar purchase, you would pay $50 at checkout and then $50 every two weeks until the amount is paid off.
This type of purchase plan has become so popular that even some credit cards are incorporating them into their credit card features. Just because it is popular, however, does not mean it is a good thing or a bad thing. Let’s discuss some pros and cons.
Positives of BNPL
NerdWallet points out some of the positives of using a buy now, pay later option.
There are a lot of credit cards that provide rewards and points. But a lot of these cards have interest associated with them. It is one of the main reasons that, when building wealth, it is important not to carry a balance on a card that will charge you interest. With buy now, pay later plans, you rarely have to pay interest.
No Minimum Credit Score
When trying to build or improve your credit, your credit score can be a source of annoyance. That number can affect your ability to buy a house or rent an apartment. It can affect what credit cards you are able to have and can sometimes limit you to cards that have a higher interest rate. Buy now, pay later purchase options do not have a minimum credit score requirement. This can be a great option for those with a lower credit score who still need to make those necessary purchases.
Available At Most Major Retailers
The widespread availability of these purchase plans make it easy to take advantage of the option. It is something that is relatively easy to use, and the fact that most of your favorite places to shop have them, makes them even more convenient.
Negatives of BNPL
The FoolProof Foundation, a non-profit organization focused on empowering the public to make wise financial decisions, has a great article about BNPLs in which they discuss some of the negatives of this purchasing option.
Encourage Impulse Purchases.
In a similar manner to how sticking an “on sale” sticker on an item can prompt somehow to buy it because “it’s just such a good deal”, BNPLs can encourage people to spend more money. In an interview with the New York Times, Laura Udis, a program director at the Consumer Financial Protection Bureau, stated, in reference to BNPLs, “They can be helpful to consumers in the sense that they don’t carry interest if paid on time, but consumers can end up buying more than they planned.”
Late Fees And Credit Impact
Missing a payment or not having a payment go through for the BNPL can cause late fees and the addition of interest for the remainder of the payments. Not only that, but throughout the term of the BNPL, no on-time payments are reported to the credit bureaus. Instead, all missed payments and defaults are reported to the credit bureaus. This means that BNPLs are only capable of negatively impact your credit.
The retailer and the buy now, pay later purchase plan provider are two separate agencies. Therefore, if a product doesn’t arrive or if it is defective, you will have to dispute it with two agencies instead of disputing just with the retailer. This can increase the time and effort required to get any sort of refund, and it can reduce the likelihood that you will be successful in getting a refund.
Lack of Oversight
BNPLs do not have the same level of oversight as credit cards and loans. Many BNPLs have been accused of data mining and of selling your information to third parties. The Consumer Financial Protection Bureau is researching this issue, and BNPLs may have more oversight in the months and years to come. As of right now, there is not the same level of protection of your data.
Should You Use a BNPL
At the end of the day, you need to know yourself and your weaknesses when it comes to spending. If you are trying to improve your financial situation, build your emergency fund, or trying to get to that first million dollars, then a BNPL is not a good choice for you. If you tend to have difficulty dealing with the temptations of spending, then a BNPL is not a good choice for you.
If, however, you are struggling to purchase necessities, can limit your spending, and can make consistent on-time payments, then this might be an option to consider.
Have you used buy now, pay later purchase plans? Did they positively or negatively impact your financial plans? Let us know in the comments below, and don’t forget to follow the blog to be the notified about subsequent articles.