When shopping have you ever noticed that little option at checkout that allows you to pay off your purchase in smaller installments over time?
Companies such as Paypal, AfterPay, and Klarna offer this option. These “Buy Now Pay Later” (BNPL) services are point of sell installment loans that allow you to pay off your purchase in equal installments – typically weekly or monthly.
So, is utilizing these services the best financial decision for you?
Buy Now Pay Later programs do have some conveniences for consumers. They are often interest free if paid in full in the agreed timeframe. The payments are able to be linked to your debit card or bank – even in some cases a credit card. Also, BNPL programs do not require a good credit score for approval.
While these are certainly benefits, there are also potential downsides. For example, since paying off a purchase in lesser installments decreases how much you must pay upfront, there is a tendency to splurge and make impulse purchases that you otherwise may not have made. Another drawback is that if you accidentally miss a payment you may have to pay interest on the following payments or trigger additional fees. This could negatively impact your credit score, as timely payments aren’t reported to credit bureaus, but missed payments are. At the time of this article, most BNPY companies only pull a soft credit check before approving you for their services. Be sure to read the fine print because if they do pull a hard credit check, your credit score could be impacted. Additionally, if the product you received was defective, it may be harder to return, as you may have to be in communication with both the retailer and the BNPY service.
Before you use a BNPL service, you should carefully consider these questions. Is this purchase a need or a want? Does this purchase fit your budget? Do you completely understand the terms of repayment? Do you have the available funds set aside to pay your installments off on time and a way to ensure you don’t miss a payment? If the answer to any of these questions is no, BNPL services may do you more harm than good.
If you have more questions about this or other financial literacy topics, let us know!