The dark side of Buy Now, Pay Later: 29% of users admit to overspending

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Buy Now, Pay Later (BNPL) services have exploded in popularity in recent years. These services offer consumers the convenience and flexibility to make purchases and pay for them over time. 

However, easy access to credit can come with its downsides. According to a recent Red Ventures survey, 56% of BNPL users have experienced issues with the service, including overspending (29%), missing a payment (18%), and difficulty returning items or getting a refund.

How Buy Now, Pay Later works 

Buy Now, Pay Later is a type of short-term financing that allows consumers to make purchases and pay for them in installments over a set period, typically with little to no interest. If a borrower doesn’t make their payment, the lender will charge a late fee. 

The process is simple. When you make a purchase, you can choose the BNPL option at checkout. You then complete a short application, which is approved or denied based on a soft credit check. 

If approved, you'll pay a portion of the total cost upfront and then make scheduled payments over a few weeks or months until the balance is paid off.

Advantages of Buy Now, Pay Later

BNPL services, such as Affirm, Afterpay, and Klarna, have gained traction recently, particularly among younger consumers. There were almost 10 times more BNPL loans in 2021 compared to 2019, according to a report by the Consumer Finance Protection Bureau. 

The popularity of BNPL can be attributed to several factors. First, these services offer convenience and flexibility, allowing consumers to spread out the cost of purchases over time.

According to the same Red Ventures survey, 50% of consumers used BNPL because they wanted to pay in installments and spread out their cash flow. One in four (26%) said it felt more responsible than using a credit card. 

BNPL can also be an attractive option for those with limited credit history, as approval is often easier to obtain than credit cards. Many BNPL services offer interest-free payments, making them an appealing alternative to high-interest credit card debt.

The downsides to Buy Now, Pay Later

While BNPL services offer many benefits, they can also lead to overspending if not used responsibly. The psychology behind BNPL can encourage impulse purchases and a "buy now, worry later" mentality.

Here are some key risks that come with Buy Now, Pay Later.

Overspending 

When consumers see the option to break up a larger purchase into smaller payments, it can make the item feel more affordable than it really is. This perception can lead to impulse buying and overspending, as the immediate gratification of having the item now outweighs the long-term financial consequences.

“It takes away a barrier from purchasing, and we find when barriers are removed, people are more likely to purchase,” says Kathryn Ellywicz, a financial counselor at GreenPath Financial Wellness, a national nonprofit credit counseling agency.

The ease and speed of BNPL approval can create a false sense of financial security. Consumers may feel like they have more purchasing power than they actually do. This leads them to make more purchases than they can comfortably afford.

One of the most common consequences of overspending with BNPL is financial regret. When the excitement of the purchase wears off, and the payments start coming due, you may feel anxious about your decision. 

The Red Ventures survey found that 17% of BNPL users regretted making a purchase using the service.

Debt accumulation 

While BNPL services can be a tool for managing cash flow, they can also lead to debt if not managed correctly.

If you take on more BNPL payments than you can comfortably afford, you may struggle to keep up with the payments. Late or missed payments can result in fees and interest charges, driving up the purchase cost. BNPL providers may also report missed payments to credit bureaus, negatively impacting your credit score.

A lower score can make it more difficult and expensive to access credit in the future. It can also create a cycle of debt that is difficult to break free from.

How to use Buy Now, Pay Later responsibly 

To avoid the pitfalls of overspending and debt accumulation, it's essential to use BNPL services responsibly. Here are some tips for using BNPL to support your financial well-being. 

1. Set a budget 

To use BNPL responsibly, it's crucial to have a budget in place. Ellywicz advises looking at your income and expenses to determine how much you can afford to spend.

When creating your budget, factor in the BNPL payments you must make over the next several weeks or months. Ensure these payments fit your overall budget and don't strain your cash flow.

Stick to your budget as much as possible, and avoid the temptation to make purchases just because the BNPL option is available. Remember, just because you can break up a purchase into smaller payments doesn't mean you should if it doesn't fit within your financial plan.

2. Avoid impulse purchases

Another key to using BNPL responsibly is avoiding impulse purchases. Before purchasing with BNPL, take a step back and ask yourself if the item is something you truly need or if it's just a passing desire. Ellywicz suggests:

• Unsubscribing from retailer email lists to minimize temptation
• Removing saved credit card information from online stores to prevent quick checkouts
• Implementing a one-day wait rule for purchases to ensure you truly want the item

3. Track your BNPL payments

Finally, to use BNPL responsibly, keeping track of your payments is crucial. With multiple BNPL purchases, it can be easy to lose track of when payments are due and how much you owe.

To stay organized, create a spreadsheet or use a budgeting app to track your BNPL payments. Record the purchase date, total cost, payment schedule, and fees or interest charges. Review this information regularly to ensure you make timely payments and stay within your budget.

Many BNPL providers also offer tools and resources to help you manage your payments. For example, some apps send payment reminders and allow you to adjust your payment schedule if needed.

Alternatives to Buy Now, Pay Later

If you're concerned about the risks of BNPL or want to explore other options for financing purchases, there are several alternatives to consider.

Credit cards

Credit cards can offer similar benefits to BNPL, such as the ability to spread out payments over time. However, credit cards charge interest on unpaid balances, which can add to the overall cost of the purchase. Use credit cards with low interest rates or introductory 0% APR offers to minimize interest charges.

Personal loans 

Personal loans can be a good option for larger purchases that may not fit within your budget or credit card limit. These loans typically offer fixed interest rates and repayment terms, making it easier to plan your payments. However, personal loans may have stricter eligibility requirements than BNPL.

Save up for a purchase 

Another alternative to BNPL is simply saving up for purchases over time. While it may require more patience and discipline, saving for purchases has benefits.

"When you put effort into saving for something you want, whether it's a vacation experience or a new refrigerator, you appreciate it more," says Kendall Meade, a certified financial planner with SoFi. 

To start saving for purchases, set a specific goal and create a plan to reach it. Determine how much you need to save each month and automate your savings if possible. Consider opening a separate savings account for your purchase goal to avoid the temptation to spend the money elsewhere.

The bottom line 

Buy Now, Pay Later services can offer convenience and flexibility for consumers, but they also come with risks. As the survey shows, many BNPL users admit to overspending and experiencing issues when using the service. 

To use BNPL responsibly, you must set a budget, avoid impulse purchases, and track your payments carefully. By being mindful of your spending and using BNPL as a tool rather than a crutch, you can enjoy the benefits of these services without jeopardizing your finances.

But if you're concerned about the temptation to overspend or want to avoid the risks of BNPL altogether, consider using a credit card or saving up for purchases over time.

Editorial disclosure: Opinions expressed are author's alone, not those of any bank, credit card issuer, or other entity. This content has not been reviewed, approved, or otherwise endorsed by any of the entities included in the post.