Buy now, pay later apps are an increasingly popular way to finance purchases.
Companies like Affirm, AfterPay and Klarna let you split the cost of everyday purchases — from running shoes to groceries — into several installment payments.
Pay-in-four loans are the most common model. You’re required to make a small down payment, usually 25%, then enroll in auto-pay with a credit or debit card for the remaining three payments, often spread out two weeks apart.
It may seem like an attractive alternative to credit cards since pay-in-four plans don’t charge interest.
Pretty tempting, right? That’s the whole idea.
But buy now, pay later isn’t free money. It’s a short-term loan, and the business model is sounding alarms from regulators and consumer protection advocates.
“BNPL isn’t the life preserver it pretends to be to keep consumers from drowning,” said Ed Mierzwinski, senior director of the federal consumer program at U.S. PIRG, a consumer advocacy group. “It’s a come-on to spend more.”
Here are seven pitfalls to keep in mind with buy now, pay later services, along with tips to avoid a debt trap.
7 Dangers of Buy Now, Pay Later
It may be convenient to delay paying off a purchase up front, but be wary of these risks that come with using buy now, pay later services.
1. Buy Now, Pay Later Isn’t Building Your Credit — But It Could Hurt Your Credit
Applying for a buy now, pay later service won’t hurt your credit score because these companies don’t run a hard credit check on your history.
However, BNPL loans impact your credit in other ways.
Unlike credit cards, most BNPL companies don’t send all their data to the three major credit reporting bureaus — TransUnion, Equifax and Experian.
That means on-time payments don’t help boost or build your credit score.
Current credit reporting conventions aren’t designed for short-term revolving lines of credit, like buy now, pay later loans. Credit reporting agencies are attempting to reconcile this with BNPL companies, but it’s a work in progress.
If BNPL companies reported all their data to credit reporting bureaus under the current system, it could actually hurt consumers’ credit scores, even if they made timely payments.
“That’s because each BNPL loan is a new line of credit, which can significantly reduce a person’s average length of credit history,” said Summer Red, an accredited financial counselor and director of education at the Association for Financial Counseling & Planning Education.
On the other hand, missing a BNPL payment can still hurt your credit.
If you start missing payments, your debt could be turned over to a debt collection agency and could be sent to a credit reporting company, which can ultimately damage your credit scores.
2. You Could Also Overextend Yourself
Because buy now, pay later companies don’t report information to the credit bureaus in a consistent fashion, traditional lenders can’t see how much debt you’re really carrying.
“This could result in someone being approved for additional credit that they can’t afford to pay,” Red told The Penny Hoarder.
If you apply for a car loan, mortgage or a new credit card, for example, the lender won’t see you have $1,000 in BNPL loans coming due next month. You could get saddled with a big car payment while still paying off BNPL loans.
And since BNPL companies only conduct soft credit inquiries, one BNPL lender has no idea how much you’re borrowing from other BNPL companies.
Buy now, pay later providers won’t let you take out another loan until you catch up with late payments. But there’s nothing to stop you from splitting up another purchase with a different provider, a practice known as loan stacking.
People juggling four or more buy now, pay later loans at once were twice as likely to have missed a payment, according to a November 2022 Consumer Reports survey.
“It can be easy to miss a payment when you have a lot of individual bills,” Red said.
3. You Could Face Late Fees
Each buy now, pay later company has different terms and conditions on what happens if you fall behind on payments.
Some might not charge a late fee at all, like Affirm and PayPal’s Pay in 4. Others do: Afterpay, for example, charges up to $8, and Zip charges up to $10.
Late fees from buy now, pay later apps are becoming more common, according to a September report from the Consumer Financial Protection Bureau. It found 10.5% of unique users were charged at least one late fee in 2021, up from 7.8% in 2020.
4. You’re Also More Likely to Overdraft With Multiple BNPL Loans
Nearly 90% of buy now, pay later users in 2021 linked a debit card to autopay their loans, according to the CFPB. Recent academic research shows that BNPL users are more likely to face overdraft fees from their bank than non-users.
Overdraft fees can be costly, averaging about $30.
All five of the major BNPL companies attempt to reauthorize failed payments, in some cases, up to eight times for a single installment, according to the CFPB.
That means you could get hit with multiple overdraft fees from your bank in a short time if the BNPL company keeps running a linked debit card with insufficient funds.
5. Buy Now, Pay Later Encourages You to Overspend
By design, BNPL services encourage you to buy more and borrow more. This makes it easy — dangerously easy — to overspend.
“It’s so easy to think ‘Oh, it’s just this small payment,’” said Kate Mielitz, an accredited financial counselor and special programs manager at AFCPE. “But those small payments add up to very large payments very quickly.”
Nearly one-third — 30% — of surveyed users spent more than they would have if BNPL hadn’t been available, according to a March 2022 report from the Financial Health Network.
Similarly, 45% of people who used a buy now, pay later service said they couldn’t have afforded the purchase otherwise, the Consumer Reports survey found.
“BNPL makes it easy to make impulse purchases,” Red said. “That can quickly spiral into spending more than you can afford.”
6. BNPL Companies Push Products Directly to Consumers
Buy now, pay later companies have been tempting shoppers to split up their purchase at online checkout for years.
Now, these companies are targeting consumers in other ways, including pushing an app-driven model to directly engage with potential shoppers.
“In the app-driven model, (BNPL) lenders’ primary role is as a marketing platform to ‘push’ customers to retailers via referral clicks,” according to the September 2022 CFPB report.
BNPL lenders often collect your data, too, which they use to deploy product features and marketing campaigns targeted specifically to your buying preferences, the report found.
So even when you’re trying to save money and stick to your budget, these companies are making it harder.
“The vast data collection and monetization engines run by Big Tech firms are designed to fuel an explosion of buying and an increase in consumer debt for stuff we don’t need … and, too often, end up throwing away,” Mierzwinski noted in a response to the CFPB report.
7. Buy Now, Pay Later Doesn’t Offer The Same Protections and Regulations as Credit Cards
A patchwork of consumer protections oversee buy now, pay later companies.
This can cause headaches for consumers, including:
- A lack of standardized fees, interest rates and payment terms disclosures.
- Little if any dispute resolution rights for consumers.
- A forced opt-in to autopay.
- Companies that charge multiple late fees on the same missed payment.
Consumer complaints to the Consumer Financial Protection Bureau about returns and disputes are common, according to the agency’s September report. Some consumers, for example, were still billed for their installment payment during the refund process or during a dispute.
The Fair Credit Billing Act gives consumers the right to dispute credit card charges if there’s a quality issue with the product or a billing mistake. BNPL plans don’t qualify for this, so each provider plays by its own rules.
4 Tips to Help You Avoid a Buy Now, Pay Later Debt Spiral
Buy now, pay later services can help spread out the cost of big purchases over time, but they also make it easy to impulse buy items.
Here are a few tips to prevent you from getting overwhelmed with buy now, pay later bills.
- Only take out one BNPL loan at a time. Juggling multiple loans from several lenders makes it easier to miss a payment, incur late fees and overdraft your bank account.
- Write down your due dates. BNPL companies don’t always notify you before they withdraw money from your account. Jotting down due dates or setting a reminder on your phone a couple days beforehand can help ensure you have sufficient funds in your bank account before you get charged.
- Change your payment due date. Some BNPL companies like Klarna and Afterpay let you extend your due date. This can give you some breathing room to adjust your budget and come up with the money before you fall behind on payments.
- Decide if you really need it. Is this a need or a want? Chances are it’s the latter. If you don’t have the money to buy the item outright, kicking the can down the road won’t make it more affordable.
Rachel Christian is a Certified Educator in Personal Finance and a senior writer for The Penny Hoarder. She focuses on retirement, credit, investing and life insurance.