Buy now, pay later: is there a catch?

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Buy-it-now and pay-later services allow you to split your purchases, often without interest or fees. But is there a catch? (Shutterstock)

Between personal loans and credit cards, you have the option of spreading the cost of a purchase over several months, rather than paying in full at the time of sale. “Buy now, pay later” is a relatively recent addition to your payment options. Online retailers and a variety of vendors offer buy-it-now and pay-later services, allowing customers to easily pay for purchases in regular installments.

Here’s how buy now, pay later works and if there’s a pitfall to using this financing option.

A personal loan is another way to finance a major purchase or expense. Credible, it’s easy to view your prequalified personal loan rates from various lenders, all in one place.

What is buy now, pay later?

As the name suggests, buy-it-now and pay-later (also known as BNPL) services allow you to buy a product now and pay for it in a series of installments over a short period of time. Similar to layaway, consumers can purchase items as needed and then spread payment for those purchases evenly over a few weeks or months, sometimes without incurring interest charges.

These deferred payment services typically require you to pay a portion of your purchase upfront (25% is typical), with the remaining balance due in a series of installments. You will receive your purchase immediately – as if you had paid in cash – but you will have to make payments to settle this debt as agreed.

The most popular BNPL providers include Affirm, Afterpay, Klarna and Zip, although Apple and Paypal also offer their own buy-it-now and pay-later options. Many online stores and in-person retailers offer BNPL services at checkout, making them easy to use for large and small purchases.

Until recently, BNPL’s transactions were not reported to any regulatory bodies, such as the three major credit bureaus. However, concerns over the accumulation of consumer debt have led the Consumer Financial Protection Bureau (CFPB) to launch a market watch investigation urging these companies to start collecting and reporting certain information. In February 2022, credit reporting agency Equifax began giving BNPL providers the ability to report payments on consumer credit reports.

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Should you buy now, pay later to finance your purchases?

Chances are you’ll have the option to buy now, pay later when buying from an online merchant, or even pay in a store. But are BNPL services the right choice to finance your next purchase? Consider their pros and cons.

Advantages of buy now, pay later

  • You can pay for large purchases in installments. If you need to make an expensive or unexpected purchase, BNPL offers you a way to buy today and pay over time, even if you can’t afford the entire transaction right away. Unlike layaway, you will receive the item or service immediately.
  • It is not uncommon to see offers at 0% APR. Many BNPL services offer reasonable fees and terms, often with no interest on purchases or with low interest rates. For many consumers, this can make BNPL more affordable than making purchases with a credit card, especially for those who don’t. get a personal loan.
  • Your payments could help your credit. Some lenders and retailers have started declaring “buy now, pay later” payments. If so, your good payment history could help you build your credit.

Disadvantages of buying now, paying later

  • Missed or late payments can cost you dearly. If you do not make your payment on time or miss it completely, you will suffer negative consequences. BNPL may charge you high late fees, freeze your account to prevent future purchases, or even send your account to a debt collector (debt collections show up on credit reports).
  • Remittance requirements are defined. Buy now, pay later works like an installment loan, with part of the purchase required up front and the remaining balance paid off in agreed monthly installments. These agreements are usually short-term, and you’ll typically make four fixed payments every two weeks or every month until you’ve paid off the balance.
  • BNPL is generally limited to participating retailers. Unlike a credit card, you can only use a buy-it-now, pay-later service at participating retailers. If you are looking to make a large purchase and BNPL is not available, you will need to find another payment solution.

Some BNPL companies are starting to offer debit card accounts with built-in installment plan options. While these offer consumers the ability to split payment for purchases made at any retailer, purchase limits are tied to your bank account balance, eliminating the benefit of using BNPL for purchases. large or unexpected purchases.

Credible, it’s easy to compare personal loan rates from various lenders, and it will not affect your credit.

Credit card or buy now, pay later

Buy-it-now and pay-later services are similar to credit cards, giving you flexibility when shopping. But there are also some important differences to note:

  • Both allow you to make purchases today and pay for them later. BNPL credit cards and services make it easy to buy something immediately but pay for the transaction over time. This can be advantageous if you have an unexpected expense or need to make a major purchase.
  • The BNPL is to be repaid in a short series of installments. Unlike credit cards, which have a revolving monthly payment based on the remaining balance, BNPL transactions are refunded in installments. The purchase is divided into a predictable monthly or bi-weekly payment plan, similar to a Personal loan.
  • BNPL is only offered by participating merchants. Buy Now, Pay Later is only available through retailers that participate in BNPL programs or by requesting certain debit card products through select BNPL companies. While many retailers are starting to offer BNPL, it still doesn’t offer the same flexibility as credit cards, which are accepted almost everywhere.
  • Interest-free options may be available. With some BNPL services, you may be able to avoid interest charges as long as you repay your purchase within a short period of time. Credit cards also offer this advantage; if you pay your statement balance before the due date, you will not pay any interest on your credit card transactions. Many credit cards also offer 0% APR offers for new cardholders, which can be used for large purchases and unexpected bills.

If you decide to take out a loan to finance a purchase, Credible allows you to compare personal loan rates to find the one that suits your needs.

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