When you hear the term “buy now, pay later” (BNPL), taking advantage of this option may seem like a no brainer. This may be especially true if you don’t have the full amount needed for a purchase available up-front. But experts warn this path can truly be “too good to be true” depending on how you and your family approach purchase decisions and taking on debt.
BNPL programs offer a type of short-term financing where you spread out payments that are usually interest-free, over a short time window (such as three months), at no additional cost. Typically, consumers will pay a small percentage of the full price as a down payment and then make multiple smaller payments over a set period.
However, not keeping up with these payments or being late may reflect poorly on your credit and, ultimately, have a negative effect on your score.
BNPL growing in popularity
“We’ve seen an explosion of BNPL programs, which has been driven by retailers to increase sales,” said Josh Denton, manager of product strategy at BOK Financial®. “Their popularity has grown because of the ease of use, accessibility and the fact that it’s perceived as ‘free’ to pay over time for something.”
The number of BNPL loans in the U.S. grew from 16.8 million in 2019 to 180 million in 2021, according to a 2022 Consumer Financial Protection Bureau (CFPB) report. More than a third (39%) of U.S. adults reported having used at least one BNPL service, while 56% of those users have experienced some issue while leveraging this option with Gen Z experiencing the most problems, according to BankRate. These issues included overspending, trouble returning the item purchased and missed payments.
For retailers, BNPL programs ensure they don’t miss a sale because of shoppers’ lack of ability to pay at the time of purchase, which contributes to higher sales. But for consumers, the use of this kind of service can be a slippery slope toward more debt, Denton warned.
“These services are an attractive option, but they can quickly add up and lead to debt that might be unmanageable—especially when you have other bills to pay.”- Josh Denton, manager of product strategy at BOK Financial
What’s the difference?
BNPL programs are different from traditional loans or credit cards in that they typically have a shorter pay-off period and don’t carry interest charges or other fees. While not all BNPL lenders report to the bureaus, the number that do report is increasing. Additionally, if you miss payments and the loan is sent to a debt collector, the collector may report the activity which could hurt your credit score, according to BankRate.
A credit card, meanwhile, charges an interest rate for any balance carried into the next billing cycle. Since credit cards are tied to a person’s credit score, using them and making payments on time can help build credit for larger purchases in the future such as a house or car. Inversely, missing payments and/or having balances that are too high can damage a person’s credit score.
Another difference is regulation. BNPL programs weren’t traditionally as heavily regulated as the credit card industry. However, in 2023, that changed when the surge in BNPL programs triggered the CFPB to institute certain protections around requirements for billing disputes, refund rights, disclosures and billing statements.
Five things to keep in mind before extending those payments
More than 37% of Gen Z and 32% of millennials have leveraged a BNPL program recently to make at least one purchase, according to Morning Consult. As more and more young people leverage these programs, Denton said it might be time to have some serious discussions about the potential risks involved in the BNPL movement.
“There needs to be continued conversations around the usage of debt. Buy now, pay later options are just another form of debt that can very quickly get out of hand if left unchecked. This is especially true of young adults who haven’t yet established credit.”- Josh Denton, manager of product strategy at BOK Financial
“Building credit is an important part of your financial future, and typically, since these BNPL programs aren’t tied to your credit directly, there’s no check in place to ensure that you’re not taking on too much debt,” Denton said. “It becomes easy to overextend yourself financially, which can impact your credit long-term.”
As consumers are deciding whether to use one of these trending programs, Denton suggests five considerations:
- Pay attention to your debt. Consider the total debt you have across multiple loans and accounts so you can understand what’s feasible to pay over a short period of time.
- Ask yourself why it’s necessary. “An important question to ask before leveraging this kind of loan is ‘Why do you need this program?’” Denton said. “If you can’t afford the item, then should you really be purchasing it? You want to be careful if you can’t really afford it.”
- Know the risks. While the majority of BNPL programs are 0% interest when you make your payments on time, the amount you’re charged in late fees can be significant if you miss a payment. “This can be a big risk if you’re already overextended,” Denton cautioned.
- Understand your credit impact. Some BNPL programs don’t require a credit check but do use what is considered a “soft credit check” that doesn’t impact your score. However, some programs may conduct a “hard pull” of your credit, which can cause your credit score to be reduced a few points.
Borrowers also need to understand that leveraging BNPL programs to a point where you can’t keep up with ongoing payments may negatively impact your credit, Denton warned, which can impact your ability to secure a car loan, rent or buy a home in the future. - Proceed with caution. “BNPL programs can be like any other debt instrument,” Denton said. “You can become saddled with debt if you layer on multiple transactions without the ability to pay them all, which can be detrimental in many ways for your long-term financial health.
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