As the Christmas shopping season goes into overdrive, more and more consumers are opting for “buy now, pay later” plans, which allow you to spread out your bill payments over more weeks, generally No interest or no fees.
More and more retailers, including Amazon, Shopify and Walmart, offer payment plans, both online and in stores. The usual payment arrangement could allow you to pay 25% of the purchase price and then make 3 equal payments over 6 weeks.
To offer these options, many merchants have partnered with fintech companies such as Affirm and Klarna. But banks, credit card issuers, and payment services, including American Express and PayPal, offer their own flexible payment plans.
About a third of buyers have used bank financing. Buy Now Pay Later (BNPL) program, according to a recent survey by Lending Tree, an online lending platform. Of those who opted for said financing, the 62% stated that they had done it 5 times or more, and the 81% stated that they would do it again.
“These are remarkable figures for a relatively new product. Consumers love it and it’s probably here to stay, “says Matt Schulz, Lending Tree’s Head of Industry Analysis.
However, there are financial risks when choosing a plan BNPL, especially if you default on a payment.
According to a recent study by Credit Karma, the 34% of consumers who used BNPL services were late in one or more payments. Of that percentage, younger shoppers were much more likely to fall behind, more than half of so-called Gen Z and millennials reported missing a payment compared to 22% of Gen X and 10% of baby boomers.
Late payments can generate commissions or even place you on delinquent lists, depending on the terms of the BNPL provider. The Credit Karma survey revealed that 72% of those who defaulted on a payment stated that they thought their credit score had dropped as a result of this situation. 1 in 3 in that group said their credit score dropped significantly.
These penalties may catch some consumers by surprise, who may lose control of their payments or use more than one BNPL plan. Provider terms often differ, some charge late fees or report to credit reporting agencies, while others don’t.
“Consumers don’t always understand how these credit reporting programs work. loans or what help can they expect if something goes wrong, “says Chuck Bell, Consumer Reports financial policy advocate.
So, before opting for a” buy now, pay later “plan, he analyzes These guidelines carefully.
Take a closer look at your expenses
Your BNPL lender may allow you to spend $ 100 or up to $ 1, 000 in a single purchase, but do you have to? As the Lending Tree survey found, two-thirds of consumers said they typically spent more using these plans than they would if they had to pay the full amount at the time of purchase.
Before Clicking on “buy now”, take a good look at your budget and income to calculate how much cash will come in to cover payments.
Once you understand your spending limits, make sure you stick to them, maybe you can make a planned shopping list. And reserve an account for those future payments.
“You have to make sure you really have the money set aside for when those bills are due,” says Marguerita Cheng, a certified financial planner in Gaithersburg, Maryland.
Be careful with the traps in the frequently asked questions
“These payment services then offer plans of all kinds, some have commissions and interest and others do not”, explains Schulz. “It’s easy to get confused, especially if you have more than one lender.”
Therefore, check the loan terms on the lender’s website, which are usually on the support or question page Frequently, or call to inquire. Is there an automatically imposed late fee? Can you get a waiver if you pay just one day late? If you fall behind on a payment or if you don’t pay, will they report it to a credit bureau, possibly hurting your credit score?
Make sure you know the rules for the specific type of loan you plan to use , because some lenders provide more than one type of financing program.
Set up automatic payments
An analysis conducted last year by Cornerstone Advisors, a A banking consulting firm in Scottsdale, Arizona, found that consumers can easily lose control of their payments. One reason is that these bills are short-term and are due every 2 weeks instead of monthly, which can be confusing.
Some consumers also find the late fee to be a lower cost , but that may defeat the purpose of using these programs, argues Ted Rossman, industry analyst at CreditCards.com.
Suppose you end up paying $ 30 late fee on a $ 100 item. That results in an actual price increase of the item by 30%. If you don’t have enough money in the bank to pay that bill, an overdraft fee of $ 35 may also apply.
The surefire way to avoid these costs is to automate the entire process. Schedule regular payments through your account or bank card.
You can also set reminders by text message or by email to notify you when payments are due. Some lenders do this automatically.
Use reputable retailers
Unless you spend a small amount of money that you don’t need, a program of Installment loans are not a good way to try out a new product or service, particularly now that supply chain problems abound and there are many delays in shipments.
‘Buy now and pay later’, probably the best thing is to buy in well-known stores, that have a history of punctual deliveries and that respond quickly if there is a problem with the purchase, ”says Rossman.
Also We suggest you think twice before using these travel planning plans, for example if you plan to buy airline tickets, explains Bell, especially when it comes to online travel booking sites. You may run into inflexible refund policies if travel plans change or are canceled.
Better consider using a credit card
While loans at the point of sale they may be convenient, it may be better to use a credit card in the long term, as long as you can pay the full balance on time.
“If you use a credit card, you can build a good credit score, which is important to your overall finances, ”proclaims Schulz. You can also get rewards for your purchases, such as cash back or discounts, which can increase your budget.
In addition, you will have more consumer protection if you use a credit card. In addition to investigating disputed charges, some issuers offer purchase protection, which will cover costs if items are stolen or arrived damaged.
Ask for help when you need it, it’s worth a payment sooner rather than later.
Editor’s note: This article, originally published on 30 November 2021, has been updated to include information on a recent investigation by the Consumer Financial Protection Bureau.
Consumer Reports is an independent, nonprofit organization that works side by side with consumers to create a fairer, safer, and healthier world. CR does not endorse products or services, and does not accept advertising. Copyright © 2021, Consumer Reports, Inc.
Consumer Reports has no financial relationship with the advertisers on this site. Consumer Reports is an independent nonprofit organization that works with consumers to create a just, safe, and healthy world. CR does not endorse products or services and does not accept advertising. Copyright © 2021, Consumer Reports, Inc.