They are becoming more and more popular these days: Buy Now, Pay Later (BNPL) services. In fact, a CNBC poll concluded that 25% of US consumers recently used a Buy Now, Pay Later service. As of now, it’s the second-most used form of credit payments in the US — only topped by credit cards.
As the costs of traditional borrowing are still high, and essentials like groceries and personal care items remain expensive, the popularity of BNPL services is not expected to vanish anytime soon.
Yes, using a BNPL service can be a flexible and relatively inexpensive way to take out a small loan, but there are definitely some risks associated with these types of loans. Before you use such a service, you may want to know what you’re signing up for. And that is why in this blog I want to walk you through the pros and cons of using a Buy Now, Pay Later service, as well as the two biggest risks associated with such loans (since it is essentially a loan). All so you can make a well-informed choice on whether or not to take on this relatively new form of debt.
What is Buy Now, Pay Later?
First, let’s talk about what Buy Now, Pay Later is. Buy Now, Pay Later, or BNPL for short, is a service that allows you to make a purchase without having to make the full payment right away. (But you probably guessed that from its name, right?) In most cases, you can make the full payment in multiple installments over a pre-specified period of time, which may be free of interest charges or have a low interest rate. This service can help you make a purchase without having to come up with cash immediately, which can be helpful if you’re short on cash for a moment. But, there are some potential risks associated with this service, too, that you might want to take note of. More on those risks later — let’s first go through the pros and cons of using Buy Now, Pay Later services.
The Pros and Cons of Using Buy Now, Pay Later Services
The Pros
They Are Sometimes Interest-Free Loans
Sometimes, BNPL services offer interest-free financing for a limited period, especially when the loan amount is relatively small. This interest-free financing is why using a BNPL service could be a great way to spread out the cost of a purchase, without you having to pay a penny in interest charges. However, if you miss a payment, you may get charged a penalty interest rate, which can be quite hefty, so be wary of that.
Financial Flexibility
Another reason why BNPL services are becoming more and more popular is because of the financial flexibility they offer. Using such services allows you to make (small) purchases without you having to pay the full amount upfront, allowing you to move quickly, even if you’re short on cash.
The Cons of Using BNPL Services
Tempting to Overspend
This relatively low cost and great deal of flexibility may come at a price. Especially when you’re a regular user of BNPL services, it may be really tempting to overspend. As it makes it easier to make a purchase without the full amount leaving your account right away, you won’t feel the initial financial pain when you make the purchase. Even more so when you’re using multiple BNPL services at the same time, this could lead to overspending, which could eventually lead to accumulating debt.
Penalty Interest Rates and Late Fees
When you’re making your payments on time every time, you often don’t have that much to worry about. But, if you miss a payment on your BNPL account, you may have to deal with hefty penalty interest rates and late fees. Even if you miss only one installment, this could make the initial purchase a whole lot more expensive than would be the case if you made the payment in full right away. And that’s why it’s crucial to make your payments on time.
Hidden Fees in the Fine Print
And last but not least, be mindful of hidden fees, which can often be found in the fine print of loan agreements. Concrete examples of such hidden fees are membership fees, as some BNPL service providers work with a monthly or annual membership model. Or returned payment fees, which you may get charged when your payment is returned due to insufficient funds. Hidden fees like these are why it’s important to thoroughly read the terms and conditions before using a BNPL service — to make sure nothing in the fine print takes advantage of you.
The Two Biggest Risks of Using Buy Now, Pay Later Services
I’ve mentioned a few risks of using BNPL services before, but I want to highlight the two biggest risks on their own, too. I just want to make sure you have all the information you need to make BNPL services work for you, and not against you. Since it’s easy to slip into debt when regularly using BNPL services, it’s important to take note of those risks.
The risk of overspending is a very real risk, too. Even more so if you don’t have a great track record when it comes to managing your finances, it’s important to think twice before using a BNPL service. I know it can be tempting to buy something, get it shipped to you immediately, and only pay a few weeks later — but that’s also a way that some people slip into debt.
And then the second big risk: late fees and penalty interest charges. These can add up quickly when you don’t make your payments on time. As with basically any loan, making on-time payments is an absolutely essential practice to adhere to. Otherwise, you run the risk of falling into a vicious cycle of debt, which you could get pushed into if you’re getting overwhelmed by a mountain of late fees and penalty interest charges. And that’s the last thing we want here, of course.
Borrow Responsibly!
If you’re confident you can manage your finances correctly and don’t have a history of overspending, using a BNPL service could be a great way to borrow some money interest-free, as well as adding a dash of flexibility to your finances. But, if you have a history with debt or have missed a loan payment once or twice before, you may want to think twice about using a Buy Now, Pay Later service.
Using a BNPL service could be helpful, but there are definitely some big risks associated with using it. That’s what we talked about in this article, with the goal of giving you all the information you need to make a well-informed decision when it comes to Buy Now, Pay Later services. Remember, as with any loan, to only take one out if you’re confident you can pay it back in accordance with the loan terms. Otherwise, you run the risk of slipping into a debt cycle, which is what we want to avoid at all costs. Borrow responsibly!
