If you have made a recent online purchase, you may have been given a BNPL (Buy Now Pay Later) offer. The name is self-explanatory – you are given the opportunity to purchase the item and pay at a future date, often through installment payments. While the service being offered isn’t new, it has grown in popularity with the surge in online shopping. Some of the largest BNPL providers include PayPal, Affirm, Afterpay, Sezzle, Splitit, PerPay, and Klarna, to name just a few.
The convenience of in-person and online shopping with next-day delivery, combined with the option of choosing smaller future payments, can be very enticing.
The banking sector has advocated for more monitoring of BNPL providers that are working independently of banks and other regulated financial institutions. Banks want to encourage more oversight so that the same consumer protections afforded by banks are also required of otherwise unregulated BNPL providers. The Consumer Financial Protection Bureau (CFPB) is looking into the matter now and some findings should be forthcoming soon.
Let’s look at some of the pros and cons of using BNPL.
PROS
- Some may offer zero interest if you make your payments on time
- Easy application process
- Does not impact your credit score
- Flexibility of payments every two weeks or monthly installments for higher-priced items
- You may be able to get BNPL even with poor or limited credit (this is also a CON!)
- Set up automatic payments
CONS
- There can be “hidden fees” or additional expenses and fees
- Some transactions charge interest
- It can be easy to load up on additional debt with multiple BNPL agreements
- While obtaining this kind of credit does not affect your credit report, if you are unable to pay what you owe, it will.
- Since the payment agreement may not be reported, you are not building credit as you would with traditional forms of credit
- You may lose out on rewards you could earn with your credit or debit card
SUGGESTIONS
- Make sure the value of the product extends beyond the span of time you have to pay for it. Will buyer’s remorse kick in at that third installment?
- Consider the psychological perception of three or four smaller payments vs. the full payment. Make sure you still evaluate that full payment when deciding whether to purchase this way.
- Understand the refund/return policies and how they relate to the payment plan.
- Look for BNPL products offered by banks or by non-bank lenders that partner with a bank to help ensure better protections for both consumers and merchants.
- If you are going to use BNPL, find a provider that does not charge late fees and interest on purchases.
Finally, you should treat BNPL like any other extension of credit. You are taking on more debt. It might be just short-term, but it is still debt, nevertheless. When NSB colleagues offer financial literacy training for young people in schools, we talk about wants and needs and differences between the two. Is the purchase you are making a want or a need? Is it a want because you think you will look good in this new outfit when you otherwise have enough to wear?
BNPL may be attractive and a good option for some, but it is a net outflow of the finite amount of cash you have coming in. Before taking on more debt, ask yourself: Have you PYF’d (paid yourself first) with automatic monthly savings? Have you built up your emergency fund? Have you paid down high interest-rate debt?
Like the use of any other credit, you have to work hard to remain disciplined in your use of credit as you work toward your short- and long-term financial goals!