Terry Herr, CFP®, CLU
In today’s age of online shopping, you can buy almost anything with a click of a button, whether you can afford it or not. Traditional loans and credit cards are now being joined by a new player in the payment game: the buy now, pay later (BNPL) payment method.
Let’s take a look at the BNPL payment method, as well as some of the dangers associated with it, so you can be an informed consumer.
What is Buy Now, Pay Later?
Buy now, pay later, or BNPL, is a payment method that enables consumers to make purchases and split the cost into smaller, interest-free installments. Typically, these installments are spread over several weeks or months, making it more manageable for individuals to afford the products without paying the total price upfront. BNPL services are usually offered by third-party providers who partner with retailers to offer this payment option at checkout.
From 2019 to 2021, the total value of BNPL loans that originated in the USA grew more than one thousand percent, from $2 billion to $24.2 billion.1 Now, in 2023, it’s possible to pay in monthly installments when buying everything, from clothing to a TV to an air fryer.
The Dangers of Buy Now, Pay Later Purchases
While BNPL payment methods are marketed as a better alternative to credit cards and seem to have no downsides, there are important dangers that consumers must be aware of before signing up for a BNPL service.
Here are some of the dangers of using BNPL services:
Using BNPL services can lead to overspending, as they promote immediate gratification rather than long-term financial planning. The allure of splitting payments into smaller amounts might lead individuals to purchase items that they wouldn’t otherwise buy, which can result in a strained budget and increased debt.
Potentially High-Interest Rates
While many BNPL services offer interest-free installment plans, it’s important to thoroughly read the terms and conditions of the service. Failure to make timely payments can result in significant interest charges. For example, both Affirm and Afterpay, two of the largest BNPL companies, charge up to 36% APR after their interest-free payment terms. This means that if you don’t pay for your purchase in full during that time, you could be charged these exorbitant rates.2
In addition to hidden interest rates, BNPL services may charge additional fees, such as late payment fees or administration charges. These fees can quickly accumulate, further burdening individuals who are already struggling with their finances.
According to the Consumer Finance Protection Bureau, 10.5% of unique BNPL service users were charged at least one late fee in 2021, up from 7.8% in 2020.3
Less Consumer Protection
Inconsistent consumer protection is a concerning aspect of BNPL payment methods. BNPL companies may not be subject to the same consumer protection regulations as traditional lenders or credit card providers. This discrepancy can leave consumers vulnerable to potential exploitation or unfair practices.
BNPL payment methods continue to increase in popularity because they appear to be seamless and convenient and offer a win-win situation. But often there are terms and conditions attached to these loans that can result in enormous extra fees, so consumers must always check the fine print before deciding to use a BNPL service.
This content is developed from sources believed to be providing accurate information. It may not be used for the purpose of avoiding any federal tax penalties. Please consult legal or tax professionals for specific information regarding your individual situation. The opinions expressed and material provided are for general information, and should not be considered a solicitation for the purchase or sale of any security.