If you’re like many people, you may not always have adequate funds to make a purchase. This could cause you to either use a credit card and risk ensuing debt or delay the purchase until you have the necessary cash.
However, a financial tool with growing popularity eliminates that problem. Buy now, pay later (BNPL) apps allow consumers to buy something online even if they don’t have the cash they need.
Our guide shares why you might want to avoid using this resource and how it can wreck your finances.
Table of Contents
What are BNPL Apps?
The premise of BNPL services is simple. They allow you to buy something online even if you don’t currently have the funds.
After completing the purchase, you make installment payments until the item is paid off.
For example, if you purchase an item that costs $500, you will make payments to reach that $500 price point. These installments can be as short as weekly or occur once a month.
While the number of payments can vary, they usually max out at four per purchase. Popular buy now, pay later apps include:
- Klarna
- Affirm
- Afterpay
- Quadypay
- Sezzle
Most apps are interest-free and charge no hidden fees. This allows you to spread out your payments and not incur fees or indebtedness for the purchase.
BNPL services are growing exponentially. One in five shoppers are using such apps today, according to NPR. Unfortunately, per the report, users are now experiencing higher interest and late fees when they miss payments.
How Do Buy Now, Pay Later Apps Work?
A growing number of retailers are partnering with installment payment services. If you do a lot of shopping online, it’s likely you’ve seen the option to use this type of financing.
Here is how many BNPL apps work:
| Step | Action |
|---|---|
| 1 | Download the app and link a credit or debit card |
| 2 | Shop at your chosen online retailer |
| 3 | Add item(s) to your shopping cart |
| 4 | Select the BNPL payment choice at checkout |
Think of these loan apps as a newer version of layaway. However, in the case of buy now, pay later financing, you receive the item upon making the purchase instead of after completing payments.
This is helpful if you’re trying to manage cash flow and don’t have sufficient funds to purchase an item. In short, it acts like a line of credit.
Additionally, most services don’t perform a hard credit check, and you don’t pay interest on the payments. This is terrific if you need to make a major purchase but require several weeks or months to get the money necessary for the item.
Even though this sounds great, there is a significant downside, particularly if you miss payments. Lastly, these aren’t like paycheck advance apps. Read our guide on apps that loan you money instantly to learn more.
What are the Problems with BNPL Financing?
It is often the case that financial tools are too good to be true. Here are the common downsides of using buy now, pay later apps.
It Can Negatively Impact Your Credit
BNPL apps usually only do a soft credit check. Plus, if you make timely payments, you don’t need to worry about using these services.
However, if you miss payments, you will likely impact your creditworthiness. Most services report late payments to credit bureaus, which can impact future credit needs.
In fact, Credit Karma reports that 72 percent of people who missed one payment said their credit score was negatively impacted as a result.
Worse yet, since timely payments are not reported, these services do nothing to boost your credit.
This can be of particular importance if you’ve also had past banking problems and can’t open an account. Read our guide on second chance bank accounts you can open if you’re facing that situation.
Late Fees
BNPL companies do not typically charge fees. Unfortunately, that’s only the case if you make timely payments.
If you miss a payment, it’s not uncommon to see late fees of at least $20. That may not seem like much, but it negates the benefit of installment payments.
Additionally, some companies even charge a prepayment penalty, eliminating the advantage of using the service. If you’re in the middle of paying off debt, you may want to avoid using these apps to avoid additional indebtedness.
However, if you’re merely using BNPL financing for convenience, this won’t be an issue.
High Interest Rates
One selling feature of buy now, pay later apps is that they often have no fees. However, if you miss a payment, you usually incur exorbitant interest rates.
Rates can be as high as 29.99 percent, and that’s not on the outstanding balance either. It’s commonly on the entire amount of the purchase.
Furthermore, users report that companies have tried to remove funds from their bank accounts or sent them to a collection agency.
This may not make BNPL apps as bad as payday loans, but can they still be ruinous, especially if you concurrently use multiple apps.
Can Lead to Unnecessary Purchases
Given the growing number of retailers working with buy now, pay later companies, it is easy to purchase something you don’t need.
Thousands of retailers are now working with BNPL companies, such as:
- Amazon
- Beth Bath & Beyond
- Best Buy
- CVS
- Macy’s
- Peloton
- Target
- Walmart
Availability makes it easy to use these services. The convenience is great. But, if you’re unable to manage your spending, it’s an excellent way to incur fees and high interest rates.
This is similar to how cash advance apps work. They market themselves as a way to make ends meet, but they typically only cause more financial problems.
Read our guide on cash advance apps like Dave to learn about the different options.
Are Buy Now, Pay Later Companies Regulated?
Currently, BNPL companies are not fully regulated. The Consumer Financial Protection Bureau (CFPB) did open an inquiry on providers in late 2021.
This allows the CFPB to gather information on the companies, but there is no regulation.
As a result, there is no basic requirement to disclose fees, credit reporting, and more. While this may change over time, it has yet to do so as of early 2024, there are no guarantees.
Alternatives to Buy Now, Pay Later Financing
The big selling point of BNPL providers is convenience. In some cases, that provides a lot of benefits. In other instances, it doesn’t. Here are some alternatives to buy now, pay later apps.
Saving for the Purchase
Reports show that many purchases using buy now, pay later are not significant. Credit Karma indicates that the top three purchase categories include:
- Home and furniture goods
- Electronics
- Apparel
These items can often cost just several hundred dollars. Instead of turning to installment loans, you can save money for the purchase so you can buy the item outright.
This won’t work if you need the funds immediately. However, if you can wait several months, saving the cash is a better use of your finances.
Use a Credit Card
Buy now, pay later apps are really just a new spin on credit cards or lines of credit.
If you’re uncertain about your ability to make timely installment payments, a zero percent APR credit card can be a suitable alternative.
Only do this if you’re certain you can make payments within the interest-free APR timeframe. If you can’t, it could negate any potential savings.
Opening a credit card will also result in a hard credit check, which may impact your score. Here are some options for cards with an introductory zero percent APR.
Personal Loan
Most buy now, pay later loans max out at $2,500. This makes them helpful for managing smaller purchases, especially when they are under $1,000.
If you need to make a larger purchase, personal loans can be a good alternative. Loans will carry an interest rate, but it should be relatively low if you have good credit.
It’s also likely you will need to wait several days to receive funds. This differs from a BNPL loan, which is instantaneous. Depending on your needs, an unsecured loan may be a better fit and work well within your budget.
Credible is an excellent option to find rates from trustworthy lenders.
Bottom Line
Buy now, pay later companies offer a favorable way to finance purchases. There is no interest, and they don’t harm your credit. However, this is only the case if you don’t miss payments.
If you’re unable to manage them wisely, BNPL services can easily spiral into a source of frustration and burdensome costs.
How do you save for medium to larger-sized purchases?
I’m John Schmoll, a former stockbroker, MBA-grad, published finance writer, and founder of Frugal Rules.
As a veteran of the financial services industry, I’ve worked as a mutual fund administrator, banker, and stockbroker and was Series 7 and 63-licensed, but I left all that behind in 2012 to help people learn how to manage their money.
My goal is to help you gain the knowledge you need to become financially independent with personally-tested financial tools and money-saving solutions.
