Buy now, pay later services (BNPL services) are a version of layaway purchases. The typical app lets you spread payments into four chunks. Most require a down payment of 25%; then, you create an installment plan of three equal payments. For example, if you buy something for $400, you pay $100 at the start and make three $100 interest-free payments. Unfortunately, studies show those who use buy now, pay later financing are stressed financially and may be unable to handle the payback.
1. It’s Easy to Overspend
By their very nature, pay later services make it easier for you to spend money. For example, loan apps make qualifying easy and often have a spending limit between $50 and $1,000. Many major retailers partner with such platforms to let you spread out your payments to make a purchase. Though convenient, this can lead to overspending. Worse yet, Yahoo Finance reports users to tend to come from low-income or minority households. This can further erode their financial standing, especially if they’re using other credit-based products.
2. They Can Harm Your Credit
BNPL apps sell themselves as the perfect alternative to credit cards. Unfortunately, most buy now, pay later companies only perform a soft credit check. The app won’t help you boost your credit if you make timely payments.
However, if you miss payments, it can impact your creditworthiness. Many services will report overdue payments to credit bureaus, and that can result in a lower credit score. Credit Karma reports that over 70% of people who missed at least one payment believe their credit score was negatively impacted. You also run the risk of being sent to a collection agency.
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3. Fees and More Fees
Buy now, pay later apps market themselves as a fee-free way to get monthly financing on a purchase. But, of course, that is only true if you don’t miss payments. Many services charge late fees once you miss a payment. For example, the Consumer Financial Protection Bureau (CFPB) reports late payments often equal $7 on an average loan of $135.
A higher late fee is reasonable if you have a higher outstanding amount. While there are often no prepayment fees, late fees alone are reason enough to second-guess using the financial tool. This is especially true if you use multiple apps, opening you to potential fees with each company.
4. Exorbitant Interest Rates
Pay later services are a fantastic way to get an interest-free short-term loan. While true if you have a good payment history, that is only if you don’t miss a payment. You may face an interest penalty if you miss a payment or don’t pay off the entire amount in the given time. The most common is deferred interest, which you may see with balance transfer credit cards, which can lead to a nasty surprise. Here is how it works.
If you have an unpaid balance, the company will charge interest on the entire amount you financed. For example, if you financed $1,000 and have a remaining $100 balance, they will charge interest on the entire $1,000, going back to the day you took the loan.
5. There’s Limited Regulation
Buy now, pay later apps have grown wildly popular in recent years. Adobe reports purchases grew by 14% year over year in 2022, with revenue growing 27% in the same timeframe. Unfortunately, there is minimal regulation over the companies. The CFPB says there is some federal and state oversight on BNPL services, but it doesn’t provide much protection to consumers. This leaves users prey to a need for common guardrails around hidden fees, disclosures, and interest rates.
6. You May Continue a Cycle of Debt
Debt, especially consumer indebtedness, can restrict you from achieving financial goals. But, again, misusing BNPL apps can play a role in this. Using them to make unnecessary purchases can restrict you from applying funds to other needs. You can also incur late fees or pay interest if you miss payments. This is particularly important if you’re paying off high-interest debt, as it may only further the debt cycle.
Users of pay-later apps also typically have lower credit scores. For instance, according to Yahoo Finance, 18% of BNPL users have at least one delinquency on their credit report, and nearly 70% carry a credit card balance for more than one billing cycle.
7. You’re Left Twisting in The Wind
Credit cards can be terrific tools for major purchases as they offer certain protections. But, unfortunately, many of those aren’t available with a buy now, pay later app. For example, credit cards offer purchase protection. You can also dispute a charge if it’s over a certain dollar amount. These can be a lifesaver if you have a problem with a recent purchase.
That is not available with BNPL companies. So added together with forced auto-pay for repayment and limited regulations, you’re on your own. If you’re on edge financially, this can be particularly problematic.
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This rating is one of the most common across the nation, and those who have it know that it creates a variety of lending difficulties. Thankfully, it is possible to improve your bad credit score past this subprime rating and get the loans that you deserve.
Read More: 20 Easy Ways to Raise A Credit Score Fast
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