Buy now, pay later: Money saver or money trap?

Cash money on money counter

The term “buy now pay later” is common in retail these days.

It’s a new and improved version of store installment plans (without the high interest rates) or layaway (where Mom had to stop by the store with cash every two weeks).

But is it really a good option for people to buy things they really want but can’t afford? And what’s the catch?

How the program works

For those who can’t afford those stylish shoes or a trendy new jacket but really want them, “buy now pay later” (BNPL) could be an option.

BNPL is very popular with college students like David Germano, who says it lets him shop when his bank account is near empty.

“It’s been very beneficial towards college students because a lot of us are struggling with money because of COVID,” he said. “It lets people branch out with payments so they can afford necessities such as food and textbooks.”

Anu Fason really likes the idea as well.

“I think it is really helpful, that we should have to the option to choose if we want to pay a full payment or do month to month,” she said.

BNPL typically divides the purchase into 4 or 6 payments. The first payment is due at checkout, and the rest are due monthly — like a car loan but without interest.

How it can impact your credit

One nice thing about BNPL: Like with an ATM or credit card, the service does not impact a person’s credit when used as intended. But it can hurt a person’s credit if they fall behind, according to Neil Peterson, the chief credit officer with the General Electric Credit Union.

“If you cannot make the payment, then it goes into default with a credit agency, and then it will be on your credit report,” Peterson said.

Peterson says that those who do use BNPL should control their spending.

“The nice thing about ‘buy now pay later’ is they make it simple and interest-free,” he said. “But it is very easy for someone who cannot manage their expenses or control their spending to get into a situation that’s causing them more harm in the long run.”

A new study by Barclay’s found that almost 40% of BNPL users did not understand the credit consequences of falling behind on their payments, and a recent Refinery 29 report profiled a 34-year-old woman who overspent, fell into debt, and has now wrecked her credit score.

But if you can control your impulses, BNPL might just help you get something you need. That way, you don’t waste your money.

About the Author

John Matarese

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