Buy Now, Pay Later (BNPL) financing can seem like a cheat code when you’re shopping online. You can get your item shipped immediately with just a small initial payment. You just have to promise to pay the rest of your bill later.
BNPL financing is a convenient way to stretch your budget when you don’t have much cash to spare. But it’s not a perfect solution for cash-strapped consumers. Here are some downsides to using this financing.
1. It’s Not an Option in Emergencies
Generally speaking, BNPL financing is for luxury items and everyday shopping. It’s a point-of-sales installment loan processed by a FinTech service who partners with the specific store that sells your latest must-have.
In other words, BNPL financing has a very niche purpose in your finances. It’s for shopping, and that’s pretty much it. You can’t expect point-of-sales installment loans to help you when you need money fast in an emergency.
If you’re stuck fielding an unexpected car repair or vet bill, online loans may be another option. Rather than BNPL services, direct lenders and banks may be sources of loans online for emergencies.
2. It’s Not “Free Money”
Plenty of people click the BNPL option at checkout because it feels like an easy way to cut corners.
Let’s say you want a new set of headphones that cost $300 but can only spare $150 at the time you buy them. Through this financing, you can split the $300 into four easy bi-weekly payments, so you only ever have to pay $75 at a time.
Sometimes, BNPL is just that easy, but it’s not always the case.
Some FinTech services apply a small charge or interest rate to your purchase, just like any online personal loan. This means, you’ll be paying extra to get those headphones.
If you don’t read the fine print, you could be signing up for more than you expect.
3. It Ties up Your Budget for a Long Time
When you take on a point-of-sales installment loan, you’re pledging to pay for your headphones for the duration of your plan. In most cases, it’s a four-payment model with payments due every two weeks.
That means you’ll be paying for your purchase for six weeks, sometimes even longer, depending on your plan. While this might seem obvious, you can easily overlook how these payments affect your budget.
For the duration of your financing plan, you’ll have that much less money to spend on other things. That’s money you might need if an unexpected expense crops up along the way.
4. It’s Easy to Overspend
Point-of-sales installment loans are tricky because they sweep your spending under the rug. By breaking down your bill into installments, the majority of your payment is a “future you” problem.
Out of sight, out of mind. If you forget you’ve pledged this money for a later date, you can accidentally use it on other things.
BNPL stacking is another issue. On the surface, individual payments may seem manageable, but they add up. You might not realize just how much money you’re spending oer financing until it’s too late.
According to a Consumer Finance Protection Bureau report, the average point-of-sale installment loan ranges from $50 to $1,000. Multiple $1,000 loans could put pressure on your budget. And if you miss a payment, you will have to pay late fees.
Buy Now, Pay Later plans capitalize on the basic human need for instant gratification. You see something you want, you can get it — but for a price. Now that you know the downsides of this financing, you can make an informed decision on whether it’s worth the perks.