If you’ve been shopping online recently, you have probably noticed an increase in Buy Now, Pay Later (BNPL) payment options available at checkout. If you’re unfamiliar with this term, BNPL enables customers to make payments over time or defer payments until a later date. These payments are typically in regular installments or a single deferred payment. For example, a $100 purchase could be broken up into four weekly payments of $25. For individuals who are shopping on a budget, these payment plans can make larger purchases more manageable. However, the risks associated with BNPL might catch you by surprise. In this CUAdvice article, we’ll explore BNPL and discuss savvy spending habits to keep you financially healthy.

How does BNPL work?

BNPL can be enticing given the ability to take one larger payment and split it up into smaller, more manageable payments. If you’re on a tight monthly budget, that’s a strong selling point. This type of no-interest financing option isn’t new; layaway plans have been popularly advertised for cars, furniture, and electronics in the past. But through online shopping, retailers are now offering these services far more frequently and at much lower price points.

There are two main plan types for BNPL payments: equal payment plans and deferred payment plans. The former involves regular payments made at predetermined times and installment amounts and is similar to the example we described above. In that scenario, customers would agree to pay a minimum amount at a certain frequency (such as $25 each week for four weeks) until the full balance ($100) is paid. A deferred payment plan, however, involves simply paying the balance owed ($100) by a specified due date, with no set payment installments. This type of plan requires self-management by the customer to keep track of their purchases and corresponding payment due dates. Usually BNPL is advertised as interest free, however you should always pay attention to the fine print to understand if there are hidden penalties or late fees.

Generally, getting approved for BNPL is easy to do, and a person doesn’t need to worry about having poor credit history. However, recent research has suggested that individuals who use BNPL are often relying more heavily on other types of credit and are more financially stressed. If you are frequently taking out pay-day loans or find yourself overwhelmed with debt, it’s important for you to understand that you could be facing increased financial risk should you be unable to make your BNPL payments in full.

What are the risks associated with BNPL?

There are a number of risks associated with BNPL. As previously mentioned, while many of these services do not charge interest during the initial payment period, there will likely be costly penalties or charges if you miss or make a late payment. As well, many BNPL offers will retroactively charge interest at a very high rate back to the date of purchase if the full amount is not paid by the due date. While some plans might automatically debit payments from your bank account, that’s not always the case, so it’s up to you to remember to make your payments on time. It’s also important to remember that missed or late payments can reflect negatively in your credit score.

As well as trying to understand the fine print of these payment options, you are also at greater risk of overspending; while paying a lower price over multiple installments might sound like a great deal, you could find yourself making frequent impulsive purchases. It’s also easy to lose track of what purchases you’re still paying for. Additionally, some shoppers have even reported being unexpectedly charged for orders they’ve already canceled or returned and had stopped making payments on. Over time, these factors can lead you to spending far beyond your means, or miss payments for essentials, like your rent or power bill. This can lead to debt accumulation, negatively impacting your monthly budget and credit score.

It’s important to remember that in addition to BNPL potentially putting your credit score at risk, it doesn’t always offer you the opportunity to build credit as you could through a credit card. Some BNPLs report loans to credit bureaus, while others don’t. So, even though making timely credit card payments has a positive impact on your overall credit score, the same doesn’t apply to BNPLs that don’t report your loan. In this case, you’re missing out on improving your credit history, which could help you get lower interest rates down the line on large purchases like a vehicle or a home.

So, now that we’ve covered the risks of BNPL, what can you do to protect your financial health?

Your financial wellness

While these payment options are tempting as they give the illusion of ‘saving’ money, it’s important to remember that the money you’re spending in installments is still adding up over time. The next time you’re at the checkout screen, try asking yourself: do I really need this, or does it just feel convenient?

There are scenarios where BNPL can be a great option for you. This is often when there is an unexpected bigger-ticket item you need to purchase. Consider a situation where a major appliance breaks down, like your refrigerator or washing machine, and it has passed the warranty end date. BNPL can help you break this purchase down into more manageable payments so you can stay within your monthly budget. The key is to use it in moderation and understand what you can realistically afford.

If you know somebody who’s making frequent use of BNPL, ask them to try saving up for their next purchase instead. The logic behind this, especially for items with a higher price tag, is that once the full purchase amount has been saved, they might have a better appreciation for how much they’re actually spending—and with more time to think it over, the impulse to buy may have already passed.

If you do plan to use BNPL, make sure you’re familiar with the terms of service. How easy is it to get a refund? Are there late fees if you miss a payment, and will that impact your credit score? Putting reminders in your calendar or on your phone can help you keep track of your payment deadlines. You may also be able to set up automatic payments to be taken directly from your account for ease of mind. At the end of the day, you’ll need to be able to keep track of how much you’re spending and how much you still owe over time. Staying organized is key to avoiding becoming unexpectedly overwhelmed.

It’s easy to get wrapped up in impulsive purchases, or ‘too-good-to-be-true’ shopping deals. But remember that being a savvy shopper isn’t about finding an excuse to purchase everything you want; it’s about finding ways to save on the items you need. BNPL can make consumers feel like they’re saving money, when in reality, they may end up spending more than needed in the first place.  

The better way to spend

If you’re regularly looking for ways to buy something now and pay for it later, there are many other solutions. CUA recommends booking an appointment to speak with one of our Financial Advisors who will provide you with options and advice based on your particular situation. To do so, you can call us at 902.492.6500 or email us at info@cua.com.

Published April 17, 2023