Beware of These Traps Buy Now, Pay Later

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If you haven’t yet been tempted at checkout to spread payments on a purchase, soon you will. The buy now, pay later industry is growing rapidly, but it could be an incentive for buyers to buy they cannot afford.

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According to a new NerdWallet poll, more than a third of Americans (37%) have used a buy now, pay later service in the past 12 months. These installment loans, offered at the time of purchase, make it easy to spread the cost over multiple payments and are generally available to people without a credit check.

But many recent borrowers admit to having used BNPL to surpass themselves.

BNPL providers are dramatically expanding their customer base: Active Affirm users grew 248% from 2019 to 2021, and Afterpay users grew 483% over the same period, according to their annual reports. If you’re one of those people logging into the cashier, avoid these potential pitfalls:

1. Get into unnecessary debt

A third of recent BNPL users (33%) say they used this financing option because it allowed them to purchase multiple items that they would not otherwise have been able to get, and nearly 3 in 10 (28% ) because it allowed them to “splurge” on an expensive item they wouldn’t normally buy, according to the survey.

Do this instead: Use BNPL only for necessary items. It’s debt, and it’s rarely a good idea to go into unnecessary debt for things you wouldn’t normally be able to pay in cash. Although BNPL is convenient, ease of use is not a sufficient justification. Your textbook could be a good use of BNPL; a new wardrobe, not so much.

2. The fine print is missing

One of the attractions of BNPL is the simplicity of the terms, but the terms vary widely from provider to provider. Some, but not all, are interest free, and some, but not all, have no late fees.

Afterpay, one of the world’s largest providers of BNPL, for example, charges up to $ 8 if your payment is not received within 10 days of the due date. While this charge isn’t unreasonable, it pays off – the company collected $ 87 million in late fees in the year ending June 2021, according to its annual report.

Do this instead: If you decide BNPL is the right financial choice, know what you’re getting into. Look for one with no interest charges, reasonable late fees or no fees, and a number of installments that you can confidently fit into your budget. Also inquire about returns – some plans won’t allow a refund if you change your mind.

3. Think it will help you build your credit

One of the attractions of BNPL services is that they can allow people without credit or with bad credit to buy things on credit. According to the NerdWallet survey, more than one in four recent BNPL users (26%) say they have chosen this payment option to build their credit history.

They may be disappointed to learn that BNPL providers will send overdue accounts to credit bureaus, but cannot send payments on time. In other words, they may be more likely to hurt rather than help your credit history. Affirm, for example, does not report on-time payments on 0% interest loans paid in four bi-weekly installments.

Do this instead: If building your credit is a major concern, there are better ways to do it. A secured credit card is an option. These cards work by using the money you deposited in advance and require you to make regular and on-time payments on purchases, just like a traditional card. So you are constantly withdrawing and repaying that initial deposit.

4. Not buying yourself enough time

Most BNPL services require reimbursement in four installments; if your purchase is worth several hundred dollars, these payments can be quite large.

Do this instead: If the purchase you’re tempted to use BNPL on is large enough (and essential), a personal loan may be a better option. A credit card can be a good alternative to BNPL if you can pay off your purchase within a one month billing cycle, but personal loans are good for larger purchases that require more time. A classic personal loan allows you to extend your payments by several years, if necessary.

The article Watch Out For These Buy Now, Pay Later Traps originally appeared on NerdWallet.

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