What Are the Hidden Risks of Buy Now, Pay Later?

A Buy Now, Pay Later plan might be an attractive way to pay for a purchase. However, the best-sounding deal can come with hidden risks.  

What Is Buy Now, Pay Later?

Most Buy Now, Pay Later plans are quick and easy to secure, with no hard credit check. You typically put 25% down, receive your purchase right away, and pay it off in three future payments with no interest or fees.

This creative financing opportunity can be tempting in the following circumstances:

• You are in a cash crunch and need to spread your payments over several months.

• You are experiencing financial distress.

• You have bad credit.

• You have little credit history.

However, as convenient as this type of delayed payment might be, the ability to put off paying can enable you to purchase something you cannot afford. As a result, your debt load could increase to the point that it takes years to pay off.

What Are the Hidden Risks of Buy Now, Pay Later?

The hidden risks of Buy Now, Pay Later include the following:

Impulse Purchases and Overspending Are Encouraged

Because Buy Now, Pay Later lets you quickly receive your purchases, the platform encourages impulse buying and overextending your budget. You can rack up substantial debt by using multiple platforms for additional purchases.

A better option is to think about what you really need or want and save for a purchase before making it. However, if you decide to use the Buy Now, Pay Later option, ensure you can cover the payments before agreeing to them.

Buy Now, Pay Later Is Not Always Interest-Free

A larger loan from a Buy Now, Pay Later plan can come with longer terms and charge a higher interest rate than a credit card. Therefore, you should read the fine print and carefully consider the risks before committing.

Buy Now, Pay Later Does Not Provide Credit Card Perks or Protections

If you make a purchase with a credit card and your item is not delivered, or you receive a faulty product, returning the item and receiving a refund are fast and easy. In contrast, returning a purchase and receiving a refund from a Buy Now, Pay Later plan can be difficult. You might need to contact the lender and the seller, and no refund is guaranteed. Plus, Buy Now, Pay Later plans do not offer points or miles based on your purchases to reward you for spending as credit cards do.

Buy Now, Pay Later Does Not Help Your Credit Score

Most Buy Now, Pay Later plans do not report to the credit bureaus. Therefore, your purchases and payments will not help you establish a credit history or improve your bad credit. As a result, the plans do not impact your credit score unless you miss a payment.

Late Fees Can Add Up and Lower Your Credit Score

Missed payments on a Buy Now, Pay Later plan can lead to late fees and interest charges. Some plans report late payments to the credit bureaus and might turn your balance over to a collection agency. These activities can lower your credit score, increasing the difficulty of securing future credit, such as a car loan or mortgage.

*This information is for educational purposes only.

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