The pros and cons of buy now, pay later

You may be asked whether you want to opt into a buy now, pay later opportunity when you purchase something these days. Although it sounds enticing, you should know all the issues surrounding this type of arrangement. We’ve asked several money experts to explain the basics, so you can determine whether buy now, pay later is the best choice for you. 

What is buy now, pay later?

Accrue Savings CEO Michael Hershfield explains that buy now, pay later allows consumers to divide their total purchase into equal payments, with the first installment due at checkout.

"However, similar to a credit card, these applications often charge interest, resulting in greater debt risk," Hershfield says.

How does buy now, pay later work? 

At retailers where BNPL is accepted, Ronita Choudhuri-Wade, a personal loans expert at NerdWallet, says you’ll see an option to break up your total purchase during checkout and pay a smaller amount now, instead of the full balance.

"It may ask for your name, address, email address, date of birth, phone number, and Social Security number, and you'll also provide a payment method," she says. "Then the BNPL provider may perform a soft credit check, which won't affect your credit score, and can approve your application in a matter of seconds."

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The plans you’re offered vary by provider, but many providers use a "pay-in-four" or "pay-in-six" model, which divides your purchase into equal installments, each due two weeks apart, with the first payment due immediately, she says. For example, for a pay-in-four model, if your total purchase is $300, you'll pay $75 at checkout, then have three remaining payments of $75. As long as you make all payments on time, you'll pay off your purchase in six weeks, says Choudhuri-Wade.

What are the pros?

One advantage is that your larger payment can be divided into more manageable payments, often at 0% interest, says Choudhuri-Wade. Also, there is only a soft credit check, so there is no impact on your credit score when you apply for BNPL. 

BNPL has also become so popular that you can find it at most retailers, including grocery stores. 

What are the cons?

Although there are flexible payment terms, consumers should know about the caveats when considering a BNPL plan.

"Buy now, pay later plans can encourage overspending by obscuring the true cost of the purchase," says Ted Rossman, senior industry analyst at Bankrate.com.

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For example, he says, it may not feel like a $200 purchase if it’s four easy installments of $50.

"But the cost of these plans can add up, especially if you have multiple plans running at the same time," explains Rossman. "That can get confusing, too. If you slip up and pay late, you might be charged late fees. If you’re really late, your credit score might be damaged."

Plus, returns can be a pain point, warns Rossman.

"I’ve heard of plenty of instances in which someone returned a purchase but the BNPL provider still wanted its cut. It can be complicated anytime a middleman is involved," he cautions.

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And, BNPL doesn’t involve as many buyer protections as credit cards, either. "So resolving disputes can be an issue – if a purchase never arrived, or was damaged, etc.," he says.

Can buy now, pay later affect someone’s credit score, and how?

According to Rossman, whether a BNPL loan affects a credit score is in the process of changing, but to date, most BNPL plans are not reported on credit reports – for better or for worse.

"For better because many people are drawn to BNPL because these lenders don’t tend to be overly selective about credit quality," he says. "But for worse because responsibly using a BNPL plan doesn’t usually help you improve your credit score."

What happens if you can’t meet your BNPL obligations?  

Rossman says if you’re late enough, your payment plan could be sold to a collection agency, which would damage your credit score as long as that’s reported to the credit bureaus.

"Before it gets to that point, some BNPL providers charge late fees although not all do so," Rossman says. "They could also ban you from taking out further plans with the company."

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Rossman says the main point to understand is that BNPL is still debt.

"It may not feel that way, but this is a loan, so be careful not to over-commit," he warns. "It’s important to keep those fundamentals in mind like boosting savings, paying on time, limiting how much debt you have, etc. Ideally, you’d only take out a BNPL loan if you have a clear path to repay the loan on time without overspending."