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Risks Associated with Buy Now, Pay Later

By now, most of us have heard about Buy Now, Pay Later, particularly if you make purchases online. Buy Now, Pay Later allows you to purchase an item now, then pay for it over time. Payments are made in installments with the first due at the time of purchase. Keep in mind that this form of payment is a type of installment loan, so it’s important to pay careful attention to the terms.


Popularity of BNPL Loans


According to NerdWallet, Buy Now, Pay Later grew in popularity during the pandemic when more consumers gravitated to online shopping for non-essential items. A poll conducted in April by LendingTree revealed forty-three percent of Americans used a buy now, pay later service. This is also supported by a report from the Consumer Financial Protection Bureau that noted Americans took out a staggering $24.2 billion in loans using this payment service. Interestingly, the payment service is popular among women, Gen Z (ages 18-25), and individuals with incomes between $50,000 – $74,999.


Pros and Cons of BNPL Loans


So, what are the pros and cons of using a Buy Now, Pay Later payment plan? Here’s a list we put together.


Offer plans without interest Interest may be charged
No credit score is required Fees may be charged, especially for late payments
Most major retailers now offer them Payments are not reported to the credit bureaus


Risks associated with BNPL


While Buy Now, Pay Later may seem like an attractive way to pay for purchases, it could easily entice you to spend more than you should. Therefore, before you make a purchase give some thought as to whether or not you can realistically pay it back. Taking on too much debt could result in harm to your financial wellness.


LendingTree also reported in its April poll that forty-two percent of consumers were late making at least one payment on a Buy Now, Pay Later loan. The AP News also reported the increased popularity of Buy Now, Pay Later loans has recently resulted in a rise in delinquencies. What’s more, the Consumer Financial Protection Bureau reported a high percentage of these loans as “charged off” – an increase of 3.8 percent in 2021 over 2.9 percent in 2020. The trend is continuing based upon public filings through the first half of 2022.


So, what can be learned from all of this? A Buy Now, Pay Later payment plan is a loan, therefore, it needs to be repaid. While this popular type of loan was created to enable consumers to easily buy and pay for items over time instead of at the time of purchase, it does come with risks. Therefore, before you make a purchase, give some thought to your financial situation to determine if you really need to buy an item and can you honor the payment obligation over the agreed upon term.


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