Propelled by inflation and the pandemic-driven convenience of online shopping, Buy Now Pay Later (BNPL) services have become as commonplace as hand sanitizer in a shop entryway.
Since 2018, the number of BNPL users in the United States has grown by more than 300 percent per year, according to a 2021 report by Accenture, a financial consulting and information technology firm. As the popularity of these programs has increased, fintech companies of all kinds have introduced BNPL products.
When you make a purchase using BNPL, a third party offers you a loan at checkout to cover your purchase, in some cases with no interest or additional fees.
The list of BNPL independent providers runs long, many with unsubtle names such as Zip and Zilch. Affirm, one of the early BNPL players, went public in January 2021. In early February, Square parent Block acquired Australian based BNPL service Afterpay.
Most BNPL plans split the cost of a purchase into four payments, typically made every two weeks. Companies send your purchase after the first payment, and there is zero percent interest for the life of the loan, as long as you make payments on time. However, if you miss a payment, interest can increase to as much as 30 percent.
Although they may not disclose it at the outset, many BNPL companies also charge a late-payment fee. Some, but not all, report the transactions to credit bureaus, which could affect your credit score.
As with any easy credit, BNPL may entice you to overspend. Nearly one third of people younger than 45, who are the target of a lot of the industry’s marketing, say they sometimes spend more than their planned budget using BNPL, according to a recent study from J.D. Power, a consumer data research firm. And only about half of that group say they completely understand the payment methods available to them, the study found.
Despite the risks, there are times when BNPL can be useful—for example, if your washing machine or dishwasher breaks and you don’t have the cash on hand to replace it. But understand the fees or interest you may incur if you miss a payment or make a late payment.
Also, BNPL is “a sort of novel product that doesn’t have the regulatory protections around it that other, similar types of financial products do,” says Nadine Chabrier, senior policy and litigation counsel at the Center for Responsible Lending.
BNPL is not ideal for multiple, smaller purchases, either, because the payments may be hard to track. For all of its problems, BNPL is likely here to stay, although not all the services will endure the test of time.
(Emma Patch is a staff writer at Kiplinger’s Personal Finance magazine. For more on this and similar money topics, visit Kiplinger.com.)
