Buy Now, Pay Later (BNPL) programs may be the latest payment craze, but the concept isn’t new. These same principles made credit cards, loans, and even layaway popular. However, these payment options are gaining traction due to the lure of no-interest charges, convenient repayment schedules, and easy approvals. Combine these perks with more people relying on credit to make ends meet in an inflated economy, and it’s easy to understand the hype.
While convenient access to cheap money might be the draw, hidden dangers are lurking in the waters that many overlook accidentally – and because they don’t think it will happen to them. In this article, we’ll discuss BNPL programs, reveal hidden pitfalls, and provide tips on how to use these payment platforms responsibly.
What is Buy Now, Pay Later?
If you’ve purchased anything online lately, you’ve likely seen BNPL payment options at checkout. There are a multitude of companies that offer these services, and they partner with most major retailers.
When you checkout, you’ll see the option to pay over four monthly payments (or a similar time frame). Assuming you make the payments on time, you won’t be charged any interest or fees. Plus, there is generally no credit check.
It’s become so popular that BNPL companies are now partnering with food delivery services like DoorDash. But the bigger question is whether you should pay for an extra-value meal over four months.
First It was Credit Cards. Now It’s BNPL.
Credit cards were originally designed to help people spread out large purchases over time, cover unexpected expenses, and help with cash flow while waiting for their next paycheck to hit. However, their extreme convenience turned them into the most popular payment method. Consequently, credit card debt is one of the leading causes of financial challenges people face today.
Now, the same problem is starting with BNPL payments. But the kicker is that the penalties on these payments can be substantially more costly than even extremely high-interest credit cards. And they can create a debt cycle that can become almost impossible to escape.
Due to the newness of these payment options, there isn’t much regulation or oversight - leading some lawmakers to label these programs predatory and call for immediate laws to better protect consumers.
Your Failure is Their Business Plan
The idea that BNPL providers would lend millions of people money for free by not charging any interest is admirable – but far from the truth. Most BNPL programs break your payments into a series of equal installments, such as four payments. In theory, this is an amazing opportunity for the consumer – assuming they make all their payments.
The kicker comes when you miss a payment. The fees and potential interest rates charged by BNPL providers can be substantial. A significant portion of their business model is based on you making mistakes and accidentally missing payments.
And this problem can create a domino effect that wreaks havoc on your finances.
The Unforeseen Domino Effect
BNPL options are extremely attractive to consumers due to the interest-free aspect, easy approvals, and simple checkout process. However, if you use these payments regularly, your months could become filled with due dates. And if you use different BNPL providers through various retailers, it can quickly become confusing when payments are due, how much you owe, and to which lender.
For example, imagine you use BNPL for a purchase on the 7th of the month. Payments will be due on the 7th for the next three or four months. Then, you use BNPL to make a purchase on the 12th, 19th, and 24th.
Your payment schedule for the upcoming months will be:
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Due Dates: 7th, 12th, 19th, 24th
The following month, you use BNPL again to make a purchase on the 3rd, 10th, and 22nd. Next month, your payment schedule will be:
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Due Dates: 3rd, 7th, 10th, 12th, 19th, 22nd, 24th
Assuming your paycheck arrives conveniently within these time frames, you might be able to handle the payments (and your regular monthly bills). But what more and more consumers are experiencing is a sudden financial setback, such as an unexpected expense that temporarily derails their finances. The result is several missed payments that happen in quick succession – creating a domino effect of costly fees.
This situation is even more likely if you’re using multiple BNPL apps simultaneously – making it harder to remember and keep up with due dates.
Tips for Using BNPL Responsibly
While BNPL payments are likely not going away due to their popularity, more oversight and regulation are sure to come to help protect consumers. If you decide to use these payment options, consider the following tips to ensure your finances aren’t negatively impacted.
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Limit Use: Keep your BNPL payments to a minimum and only for purchases that justify spreading out the payments over time. Forego using BNPL for things like ordering a meal or a new shirt.
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Automate Payments: Enrolling in automatic payments with the BNPL provider is the best way to prevent missing payments and incurring costly fees. Just ensure you have the funds available in your account before your due date to avoid overdrawing your checking account.
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Track Your Due Dates: Use an app or calendar to log each of your upcoming payments. This tactic is especially helpful if you’re using multiple BNPL lenders, as it provides an easier way to see all your upcoming payments in a single place.
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Consolidate Payments: For simplicity, some BNPL providers allow you to consolidate multiple monthly due dates into a single payment. Not all lenders provide this service – and if you’re using various BNPL services, you’ll have to do this for each account.
We’re Here to Help!
Convenience is a major driving force behind how and why people use specific payment methods. Credit cards have long stood at the top of the hill, but BNPL options are rising quickly. It’s important to remember the original purpose of these payment plans – to help spread out large purchases over time and cover unexpected expenses. Using them for everyday purchases can lead to costly financial challenges.
If you have questions about BNPL payments or want to consolidate these payments into a lower-rate personal loan, we’re happy to help. Please stop by the Credit Union or call 410-687-5240 to schedule an appointment.