From the very beginning of the pandemic, the option to “buy now, pay later” has skyrocketed in popularity. Its popularity has increased especially among young and low-income consumers who may not have ready access to traditional credit.
You may have noticed the option to spread out the payment into smaller amounts over time if you shop online for things like clothing, furnishings, sneakers, or concert tickets. The service is provided by businesses including Afterpay, Affirm, Klarna, and Paypal, with Apple expected to enter the market later this year.
How does the Buy now, pay later thing work?
Buy now, pay later businesses advertise themselves as “interest-free loans” and ask you to download an app, attach a debit or credit card to your bank account, and sign up to pay in weekly or monthly installments. Before approving borrowers, certain businesses, including Klarna and Afterpay, perform soft credit checks that are not reported to credit bureaus. Most approvals happen quickly. Following that, scheduled payments are automatically taken out of your account or charged to your credit card.
The services generally don’t charge you more than you would have paid upfront, meaning there’s technically no interest, so long as you make the payments on time.
But if you pay late, you may be subject to a flat fee or a fee calculated as a percentage of the total you owe. These can run as high as $34 plus interest. If you miss multiple payments, you may be shut out from using the service in the future, and the delinquency could hurt your credit score
Are the purchases protected?
In the U.S., buy now, pay later services are not currently covered by the Truth in Lending Act, which regulates credit cards and other types of loans (those paid back in more than four installments).
This implies that it might be more challenging for you to resolve disagreements with retailers, make returns, or recover your money in fraud situations. Companies are not required to provide protections although they may do so.
The National Consumer Law Center’s assistant director, Lauren Saunders, urges borrowers to avoid linking their credit cards to buy now, pay later applications as much as possible. If you do, you forfeit the benefits of using the credit card and put yourself in danger of owing interest to the card issuer.
What are the other risks of ‘buy now, pay later’
Because there’s no centralized reporting of buy now, pay later purchases, those debts won’t necessarily appear on your credit profile with major credit rating agencies.
As a result, other businesses may permit you to purchase more goods, even if you are unable to pay for them since the lenders are unaware of how many loans you have established with other businesses. Missed payments are reported to credit rating agencies, whereas on-time payments are not.
Right now, buy now, pay later can often cost you rather than help you establish credit, according to Saunders. People might not think about this question seriously enough, according to Elyse Hicks, consumer policy counsel at the progressive charity Americans for Financial Reform.
People may believe that they must get what they need now and pay for it later in installments as a result of inflation, she explained. But in six months, would you still be able to afford the same items you can now? ”
Who should use ‘buy now pay later’?
Buy now, pay later loans are a somewhat sound, interest-free kind of consumer borrowing if you have the ability to make all of your payments on schedule.
In the words of Saunders, of the National Consumer Law Center, “they have a place if (the loans) perform as promised if individuals can avoid late fees and if they don’t have difficulties managing their finances.”
A credit card is a better option, though, if you’re trying to raise your credit score and can make your payments on time. The same is true if you desire robust legal safeguards against fraud and transparent, centralized loan reporting.
Consider whether the costs charged by purchase now, pay later organizations would add up to greater charges than the penalties and interest a credit card company or another lender would charge if you’re unsure whether you’ll be able to make payments on time or not.