Should you use 'buy now, pay later'?
Such loans 'may be encouraging younger and lower-income Americans to take on too much debt'
In recent years, "buy now, pay later" loans have "soared in popularity because of high prices and interest rates," reported The New York Times. These loans, which allow consumers to "pay for purchases in installments," are "often interest-free" and "aren't routinely reported to credit bureaus," explains the Times.
While this might sound like an easy way to make a purchase without forking over the full amount at once, these loans aren't risk-free. In fact, per Experian, "using buy now, pay later services can open users up to financial risks that may not be worth the convenience in the end."
How do buy now, pay later loans work?
As Investopedia explains it, buy now, pay later (BNPL) is "a type of short-term financing that allows consumers to make purchases and pay for them over time, usually with no interest." With BNPL, you'll "make a small down payment, such as 25% of the overall purchase amount," when you make the purchase, and then you'll "pay off the remaining amount in a series of interest-free installments, usually over a few weeks or months," explains Investopedia. These payments can be taken from your debit card, credit card, or bank account, or you may have the option of using a check or bank transfer.
Subscribe to The Week
Escape your echo chamber. Get the facts behind the news, plus analysis from multiple perspectives.
Sign up for The Week's Free Newsletters
From our morning news briefing to a weekly Good News Newsletter, get the best of The Week delivered directly to your inbox.
From our morning news briefing to a weekly Good News Newsletter, get the best of The Week delivered directly to your inbox.
Often, you'll see the option for a buy now, pay later plan offered when you go to check out, though you may also be able to use a BNPL app or access options through your credit card, per Investopedia. If you decide to take advantage, you'll need to complete a brief application, which usually requires "information like your name, address, email address, date of birth, phone number and Social Security number," as well as details for a payment method, per Nerdwallet.
You'll find out "in a matter of seconds" if you're approved, reports Nerdwallet, and no hard credit check is involved, meaning the application won't impact your credit score.
What are the risks of using buy now, pay later?
Here are some of the major risks of BNPL worth noting:
Looser regulation and varying repayment terms: Before you enter a BNPL agreement, it's crucial to review the repayment terms. Per Investopedia, "BNPL financing is not as closely regulated as credit cards are," and "terms can vary significantly." For instance, some companies offer only a month to repay the loan, while others may give you six months or longer.
Interest, fees, and potential credit impacts: While BNPL plans don't usually charge interest, according to Nerdwallet, "longer-term BNPL plans, which are becoming more common, may charge an annual percentage rate up to 36%." If you miss a payment, you may face "late fees or interest on your unpaid balance," according to Experian. And "should you stop making payments altogether, buy now, pay later services can also turn your account over to a collection agency," which means "your credit score could also be put in danger," Experian notes.
Possibly difficult returns: Using BNPL can make returns more challenging. For instance, in one example from Investopedia, "a merchant may allow you to return the item, but you might not be able to cancel the buy-now-pay-later arrangement until you can provide proof that the return has been accepted and processed."
Financial overextension: Another major risk of buy now, pay later is that it can encourage overspending. As the Times reports, "such loans may be encouraging younger and lower-income Americans to take on too much debt."
Is buy now, pay later worth using?
According to Experian, "whether or not you should use buy now, pay later depends on your personal financial situation and responsibility."
Before moving forward with BNPL, consider whether you'll be able to make payments on time and if you can keep your bank account funded to avoid overdraft fees when automatic payments occur. Though you're only paying a portion of the cost upfront, it's also important to assess whether you can really afford the full amount within your existing budget.
And even if your budget can handle the payments, remember that BNPL still involves taking on debt. Per Nerdwallet, "it's rarely a good idea to go into debt for a nonessential purchase," so instead consider reserving BNPL "only for necessary expenses, like a mattress for your home or a computer for work or school."
Create an account with the same email registered to your subscription to unlock access.
Sign up for Today's Best Articles in your inbox
A free daily email with the biggest news stories of the day – and the best features from TheWeek.com
Becca Stanek has worked as an editor and writer in the personal finance space since 2017. She previously served as a deputy editor and later a managing editor overseeing investing and savings content at LendingTree and as an editor at the financial startup SmartAsset, where she focused on retirement- and financial-adviser-related content. Before that, Becca was a staff writer at The Week, primarily contributing to Speed Reads.
-
What's next for US interest rates?
The Explainer Stubborn inflation forestalls anticipated rate cuts
By Becca Stanek, The Week US Published
-
Russia rattles nuclear saber, orders tactical nuke drills
Speed Read President Vladimir Putin has ordered Russian military to hold nuclear weapons drills in response to Western "threats"
By Peter Weber, The Week US Published
-
Five top new women's watches
The Week Recommends From dancing diamonds to reconfigured classics, these models were recently revealed at Watches & Wonders Geneva 2024
By Alexandra Zagalsky Published
-
What's next for US interest rates?
The Explainer Stubborn inflation forestalls anticipated rate cuts
By Becca Stanek, The Week US Published
-
How much can you save shopping secondhand?
The Explainer Many Americans are buying pre-owned items to counteract the effects of inflation
By Becca Stanek, The Week US Published
-
What is a home energy audit and when is it worth getting one?
The Explainer This evaluation of your home's efficiency can pinpoint where exactly it's wasting energy
By Becca Stanek, The Week US Published
-
Should you wait to claim Social Security benefits?
The Explainer The longer you wait to collect, the larger your monthly checks may be
By Becca Stanek, The Week US Published
-
Is it actually economical to fly basic economy?
The Explainer Airlines have placed so many restrictions on basic economy, you may wonder if it's even worth the savings anymore
By Becca Stanek, The Week US Published
-
Who actually needs life insurance?
The Explainer If you have kids or are worried about passing on debt, the added security may be worth it
By Becca Stanek, The Week US Published
-
Job scams are increasingly common. Here's what to look out for.
The Explainer You should never pay for an application or give out your personal info before being hired
By Becca Stanek, The Week US Published
-
How (and why) to have the inheritance talk with family sooner than later
The Explainer The hard conversations aren't going to get any easier if you wait
By Becca Stanek, The Week US Published