Buy-now-pay-later (BNPL) apps and services are becoming increasingly popular payment options, due in part to the flexibility they offer. Many of these services offer interest-free or low-interest installment loans for online purchases, which gives the consumer more time to pay for their products. For some, these apps present a way to avoid credit card debt, but others remain skeptical. No matter your stance on these BNPL services, it’s important to know the potential risks prior to signing up.

Avoid Overspending
Simply being given the opportunity to purchase an item now and pay for it later, could cause someone to overspend.  In fact, according to a recent LendingTree survey, “two in 3 shoppers who’ve used buy now, pay later financing said it’s caused them to spend more” than planned or budgeted. If utilizing these services, it’s important to keep your budget in mind and avoid spending more than you can afford.

Know the Interest Rates & Fees
While many BNPL apps offer short-term installment loans interest-free, fees and interest are still assessed if a payment or automatic withdrawal is missed. Some services, like Afterpay and Klarna, assess a set fee for lateness.  Late fees generally cap at a certain percentage depending on the length of lateness. BNPL apps may offer added convenience to shoppers, but it’s important to take into account any hidden fees or interest charges.

Watch the Due Date(s)
Services like Afterpay operate by offering a consumer the option of spreading their purchase out over four installments. The first payment is made the day the order is submitted, and the remaining payments are spread out every two weeks over a six-week period. Other services, like Klarna, offer multiple finance options. Two of their options, Pay in 4 and Pay in 30 Days offer flexible interest-free installment loans. The first option operates much the same way as Afterpay’s structure, but the latter gives the shopper 30 days to try an item before paying for it in full. For larger ticket items, Klarna offers low-interest payment plans. No matter the length of time a consumer chooses, remaining conscious of all due dates will help in avoiding hefty late fees.

Don’t Rely on Credit Bureau Reporting
While credit card companies are required to provide your history to the major credit bureaus, buy-now-pay-later services aren’t required to report this information. Since they aren’t required to disclose information in the same way, an individual’s credit score often isn’t a factor in establishing an account with a BNPL service. While this can be beneficial for someone with less than stellar credit who is looking for financing options, it may not be the best idea for someone seeking to build or improve their credit.

Despite their growing popularity, many people still remain hesitant when it comes to buy-now-pay-later apps and services. It can be argued that they may cause a tendency to overspend and can get expensive if payment deadlines are missed. On the other hand, BNPL services can offer flexibility in financing for consumers who may not otherwise have financing opportunities. Whether you support these services or remain uncertain, knowing how they operate may be beneficial in deciding if they are the right fit for you. 

If you remain indecisive about BNPL services, there could be other options available to you. If you are seeking something convenient and flexible, a credit card may be the right fit for you.  And if you pay your balance off each month, you can avoid incurring interest fees, plus you may even be able to earn rewards or cash back on the purchases you make. Alternatively, if you are looking to finance a larger purchase, a personal loan may be the better fit for you. Here at DCCU, we offer a variety of credit cards as well as lending options that fit your needs. 

This article is for general information only and not intended to provide specific advice or recommendations for any individual.