I Think Everyone Should Avoid Buy Now, Pay Later Programs

• Buy now, pay later programs are ubiquitous, but it makes it too easy to spend more than you have.
• These are loan programs, and they come with late fees up to 30%. One in three users was late with a payment.
• As a financial planner, I recommend saving for these purchases instead of postponing payment.

Have you ever filled your online basket and gone to the checkout only to see that it is much more than you wanted to spend? Enter buy now, pay later, a popular financing option that allows you to make a small payment in advance and walk away with your entire car.

Sounds too good to be true? I would argue this is for sure. I see it as a form of predatory lending, and it seems like others are catching on: The Bureau of Consumer Financial Protection recently began investigating BNPL companies to see if consumers are making more debt than they can handle .

As a financial planner, I always recommend using BNPL programs. Here’s why.

How to buy now, pay for work later

Buy now, pay later is a short-term financing option that allows you to break up larger purchases into smaller ones, spread over a period of time. Although each program works differently, most divide a purchase into four equal payments over six weeks. You will usually need to make about 25% of the purchase to receive your items, which essentially removes any price friction from the online shopping experience.

BNPL is everywhere. Sometimes referred to as alternative financing, BNPL is integrated with most online retailers, and explodes during the pandemic as more people spend time at home and shift their shopping habits online. More than half of all Americans previously used a BNPL service, with an average purchase size of $ 690.

There are third-party companies that offer BNPL, such as Afterpay, Affirm and Klarna. And recently, major retailers like Amazon and Apple have deployed their own financing options.

BNPL programs are basically loans

Although it has a different name, buy now, pay later is essentially a type of installment loan.

Although it markets itself with fringe benefits such as interest-free payments, the ability to apply, qualify and pay using BNPL in just a few minutes with just a few clicks makes it much easier, more convenient and dangerous than a traditional personal loan.

With a regular personal loan, you will have to apply directly from a financial institution, which will take into account your account.

credit score

and other financial factors. With most BNPL programs, you will only undergo a gentle credit check, and they tend to be more lenient with their approvals.

BNPL financing can make things you previously could not afford seem within reach, like that flashy new mat or expensive new computer. It can be easy to consider a product as cheaper than it really is and not predict how it really fits your budget.

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Why I always recommend against BNPL programs

In theory, buying now, paying later is a good option to budget for large purchases over time – as long as you repay it on time. If not, you can pay late fees or, in some cases, interest, sometimes up to 30%. This is pretty common: A recent study found that one in three consumers who buy now use, pay later, fall behind with one or more payments, and 72% say their credit score has dropped due to BNPL.

I believe buy now, pay later play right into our desire for immediate gratification above delayed gratification, and encourage impulse buying. When we want something and have the option to pay for it now (especially with a discount), we take it – and assume we will be able to handle it in the future. Unfortunately, we can not always predict the future, and may end up incurring more debt that we are able to pay off.

The short length of most BNPL programs also makes it difficult to find the funds to repay the loan on such short notice. In addition, if you purchase multiple items using this financing option, you will face a combined monthly payment that may be much larger than you expected. And if you can not repay it, you could face fees, interest and debt. More than half of people say they regret making a purchase through BNPL because it was too expensive.

While it is possible to use BNPL wisely, I think the potential disadvantages may outweigh the positives. In most cases, I recommend saving for the type of purchases that BNPL often requires, such as clothing, furniture, or technology. Often these are not “essential” products, and you will not need them right away – and once you save and have enough money, you may realize that you did not really want or needed it.

The bottom line? Avoid buying now, pay later.