Buy Now, Pay Later (BNPL) is a popular option at the digital checkout. It promises to spread out the cost of must-have items without any fees.
Sound too good to be true? While these short-term loans can be convenient, especially around the holidays, they aren’t perfect. Keep reading to find out why.
3 BNPL Spending Traps to Watch out For
Here are three common issues regarding BNPL short-term loans.
1. BNPL isn’t Regulated
As a relatively new FinTech service, BNPL financing isn’t under the same regulation you expect from different types of options like personal loans, lines of credit, or credit cards.
In fact, there is no existing federal-level regulatory framework designed for BNPL.
Watchdog Consumer Financial Protection Bureau is pressing for increased legislation to improve consumer protections, which will likely come into being as BNPL’s popularity grows. For now, however, these programs fall under a regulatory gray area, according to Consumer Reports advocate Chuck Bell.
2. They Encourage Overspending
According to a 2022 survey, half of all BNPL shoppers spend between 10 to 40 percent more than they plan compared to using a credit card. The leading BNPL service provider Klarna reports the average consumer increases their checkout value by 45 percent when they rely on this financing.
Downloading certain BNPL apps unlocks deals with the affiliate marketing partners. While capitalizing on a sale can save money on essentials, it can also encourage you to spend more if you purchase items you don’t need.
3. Late Fees Are Steep
Research shows nearly half (43 percent) of BNPL users from the past two years admit to making a late payment. It’s easy to lose track of deferred payments, especially if you stack multiple financing plans together. And if you overcommit, the collective price of all your payments may be too hard to hit, even if you can afford them individually. Late fines ensue.
4. Returns May Be Difficult
Because BNPL services act as a middleman between you and a retailer, they can complicate returns and refunds. In the confusion, some users have paid installments on something they’ve returned, while others have their accounts turned over to debt collectors when they stop paying for a refunded item.
How to Use BNPL Like a Pro
Follow these tips to use BNPL safely.
1. Limit and Track Your Spending
You can overcome the risk of overspending with mindfulness. Check in with your budget to understand what you can comfortably afford to pay long-term.
Drop your installments into your budget before you apply to see what it does to your cash flow. If you can still handle your usual spending and saving, this financing option might not be a problem.
2. Read Your Terms of Service
Terms of service are vital reading materials before you accept this financing option. This document contains all the details about how this method works, including how much you will have to pay, akin to a personal loan or line of credit contract.
3. Automate Payments
Two-thirds of those people who paid their BNPL loans late did so because they lost track of payments — not because they ran out of money. You can avoid this mistake simply by automating your payments. This way, your bank or credit card company will automatically transfer funds by the due date.
Bottom Line:
If you decide to use BNPL financing, do so with caution. Use your budget and always read the fine print.