Financial Fact: Is the Buy Now, Pay Later Trend a Debt Trap?

By Keith R. Davenport, CFP®, MPAS^TM

Jasmine had been eyeing a cozy, oversized sweater for weeks. It was perfect for the chilly fall weather, but at $120, it wasn’t in her budget this month. While browsing the online store again, she noticed a small banner under the price: “Buy Now, Pay Later – 4 interest-free payments of $30.”

Curious, she clicked through to learn more. No credit check. No interest. Just a way to split the cost over time. Jasmine hesitated. She’d never used the Buy Now Pay Later (BNPL) option before but the idea of manageable payments without fees was appealing.

She added the sweater to her cart, selected the BNPL option at checkout, and completed her purchase in minutes. The first $30 was charged immediately, and the remaining payments scheduled every two weeks.

What is Buy Now Pay Later

Buy Now Pay Later (BNPL) is a short-term loan that allows consumers to pay for products, such as clothing, makeup, home décor, and appliances, in smaller installments over a short period, typically ranging from six weeks to a year. The loans are usually interest free and rarely have fees.

BNPL options are most commonly offered at the checkout of online retailers. Depending on the provider, you pay nothing or 25% at checkout, with the rest of the payments due in two-week increments. Payments are automatically deducted from a linked bank account or credit card. The seller receives the entire amount from the loan provider.

Financial technology such as mobile apps and digital platforms are also used in BNPL. Banks are increasingly offering BNPL to compete with platforms like Klarna and Affirm. Some credit unions offer BNPL directly through debit cards, with no credit check and pre-qualified offers, while some banks let cardholders split purchases of $100+ into equal monthly payments. National banks are largely exempt from any state regulations that municipalities may have for BNPLs.

Why the Rise in Popularity

BNPL plans are especially popular among younger generations, though people of all ages use them, especially those facing financial challenges. These plans offer smaller, interest-free payments and typically don’t require a high credit score for approval. Unlike layaway items, you receive your items immediately.

Most BNPL lenders perform a soft credit check, which doesn’t affect your credit score as long as payments are made on time. Approval is usually fast and easy.

For consumers with low credit scores or limited cash flow who don’t have or prefer not to use a credit card, a BNPL plan can serve as a helpful bridge between paychecks. Even for those who can afford the item upfront, spreading out the payments can help maintain cash flow.

The Downside

As with most financial tools, BNPL comes with potential drawbacks. Recent reports show a growing number of people are falling behind on their payments. In the past year the number has risen from 34% to 41%. While most are only a week late, even short delays can have consequences.¹

Although BNPL typically doesn’t currently impact your credit score, late or missed payments can be reported to credit bureaus and may trigger involvement from collection agencies. These delays can also lead to fees and interest charges, sometimes as high as 36%.² Some BNPL providers conduct hard credit checks during the application process, which can temporarily lower your credit score. Note: new FICO models and Experian reporting will soon include BNPL data. Missed payments could have longer-term negative effects on your credit.

Perhaps the biggest concern is that BNPL doesn’t always feel like debt, tempting shoppers to spend more than they can afford. Automatic payment from a bank account can lead to overdrafts and associated fees. Easy access can lead to impulse buying and multiple BNPL accounts, creating hidden debt that’s hard to track.

Lastly, BNPL loans are lightly regulated, meaning limited consumer protection and fewer options for resolving disputes.

The Bottom Line

BNPL loans can be a useful tool when used responsibly. But consumers should not fool themselves; they need to recognize this is still a form of debt. Understanding your financial situation and maintaining control over your spending are key to using BNPL wisely.

• Make sure you can afford the payments.
• Know your budget: Only use BNPL for planned expenses, not impulse buys.
• Track your commitments: Multiple BNPL plans can add up quickly and strain your cash flow.

Two days later, the sweater arrived. It was everything Jasmine hoped for—soft, warm, and stylish. Jasmine felt good about her decision. She hadn’t strained her budget, and she’d learned about a flexible payment tool she could use responsibly in the future.

Sources:

¹https://www.lendingtree.com/personal/buy-now-pay-later-loan-statistics/

²https://www.pbs.org/newshour/economy/should-you-use-a-buy-now-pay-later-loan-heres-what-to-know