You’ve probably heard about Buy Now, Pay Later (BNPL) services and may have used one to shop. But how much do you know about them?
We’ll share everything you need to know about how they work, including the impact they can have on your finances and the overall economy. That way, you can decide whether to use them to pay for what you want.
How Does BNPL Work?
“BNPL plans are one of the few financial instruments whose name accurately describes the service. You make a purchase now but pay for it over time,” said Howard Dvorkin, certified public accountant (CPA) and chairman of Debt.com.
A BNPL plan is a form of credit that enables a consumer to purchase a product and then pay for the product over a period of time. Under a typical BNPL arrangement, you’ll pay 25% of the item’s cost at checkout. Then, you’ll make three more equal payments every two weeks for six weeks to pay off the debt. Usually, your account will be set to autopay, so it will charge your original payment method on the due date.
Many shoppers like these plans because you generally won't be charged interest or fees on short term arrangements if you make all your payments on time . Plus, since BNPL providers usually don’t run a hard credit check, the plans are often easier to qualify for than a credit card.
Some providers offer BNPL plans with longer repayment terms, such as six or 12 months, to help you buy more expensive items. However, these plans generally have stricter credit requirements and charge interest and fees.
Gen Z’s Use of BNPL
BNPL services are more popular than ever. According to research from Adobe, shoppers will spend $18.5 billion online using BNPL this holiday season – up more than 11% from last year.
Gen Z members are among those leading the way, with 38% of those surveyed planning to use a service. Common reasons cited include wanting to save money for other expenses or being able to afford an item that didn’t fit into their budget. “For lower-income individuals and those who live paycheck to paycheck and are denied credit or are in debt collection, BNPL is the optimal solution,” said Myra Alport, accredited financial counselor (AFC) and founder of Myra Alport Money Coach.
How It Could Affect Your Finances
You may like BNPL services because they’re simple to use and help you buy what you want, even if you don’t have the cash to pay for it. However, if you’re not careful, these payment plans can lead to overspending and never-ending debt.
Dvorkin said, “The reason credit card debt is such a problem in this country is because it's so easy to swipe your card. Heck, you don't even need it with you to shop online. I fear BNPL will do the same thing. The convenience will hurt many more people than it will help.”
Plus, known as phantom debt, your loans generally won’t appear on your credit report unless you miss payments. That means BNPL plans usually won’t help you build credit – but they can hurt your credit score if you don’t manage them responsibly.
Your provider may also charge a late fee if you forget to send your payment or if your automatic payment method fails. While it may not seem like a lot, a few dollars per missed payment can add up over time – especially if you have multiple BNPL loans.
The Impact on the Economy
BNPL plans can be a good thing for the economy since they help you buy more products and services from businesses. However, companies have to pay a fee to the BNPL provider when you sign up for a plan (just like when you use a credit card). They may increase their prices to offset the BNPL service fees, making the items you want more expensive.
“There is also a certain amount of risk associated with BNPL lending if you stop making payments. In that case, the debt may be turned over to a debt collection agency that will purchase the debt for a fraction of the cost from the BNPL company,” said Alport. The BNPL provider may increase their fees or make it harder to get a loan if enough consumers don’t repay their debt.
In general, widespread excessive debt can hurt the economy since consumers will have less cash to spend, save, and invest. When that happens, businesses may close or lay off workers, and the country could enter a recession.
Beyond that, the BNPL loan balance is projected to reach $687 billion globally by 2028. Since the loans are phantom debt, it will be tough to gauge the true financial health of the average American and the economy overall. When economists don’t have accurate spending and debt data, it’s more difficult to recommend appropriate policy and law changes.
Credit Card Company Response
Some credit card companies have started offering their own version of the service to compete with popular BNPL providers like Affirm, Klarna, and Afterpay. For example, one credit card lender offers a BNPL-style plan to past transactions or new Amazon purchases.
For past purchases, you’ll pay a fixed fee of up to 1.72% of the purchase amount instead of interest. When you shop on Amazon, you’ll pay a fixed annual percentage rate (APR) that’s less than or equal to your credit card’s APR.
Payment plan approval isn’t guaranteed. You’ll have to meet the company’s credit requirements and other criteria.
The Bottom Line
“I've spent three decades helping people get out of debt, and if I've learned anything, it's this: Every new idea that makes it easier to borrow money drives millions of Americans deeper into debt.
“BNPL will help some people who have the discipline and income to make their payments on time. But many more will get sucked in by the promises and spit out by their lenders. They'll end up with more debt than they can ever pay off, which will lead many to bankruptcy,” warned Dvorkin.