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Buy Now, Pay Later: The Pros and Cons of This Type of Consumer Credit

When people want to purchase something now but pay for it later, they usually buy it with a credit card. But there’s an alternative to credit cards that accomplishes the same thing but potentially at a lower cost.

Known as “buy now, pay later,” or BNPL for short, this is a service offered by a growing number of retailers. BNPL became especially popular during the pandemic when many people were struggling with their finances due to COVID-related job losses and income reductions.

How Does BNPL Work?

Buy now, pay later is essentially an installment loan for consumer purchases. When you buy an item, the purchase price is divided into multiple payments of equal amounts. The first payment is made when you check out and the remaining payments are usually billed to a credit or debit card in three installments, spaced out two weeks apart. This is known as “Pay in 4.”

BNPL is most commonly found with online purchases, though some brick-and-mortar retailers like WalMart and Macy’s are now offering it as well. In this way, it’s kind of like the old days when small-town merchants would let some of their customers run a “tab” at the store and pay for their purchases over time. (Think the Oleson’s Mercantile store in Little House on the Prairie.)

Some retailers require consumers to complete a short credit application to buy now, pay later. These are referred to as “soft” credit checks that usually don’t affect a consumer’s credit score, and approval takes just seconds. Even consumers with poor credit or no credit may be approved for BNPL.

Most BNPL plans do not charge interest on outstanding payment amounts. This offers a big benefit compared to credit cards, most of which charge hefty interest rates on outstanding balances after the initial grace period. Most BNPL plans do, however, charge a late fee for missed payments.

Who Are the BNPL Providers?

Here are the main providers of BNPL, along with the interest rates and fees charged and their payment terms:

Some retailers offer more than one BNPL plan at checkout. In this case, you should study each plan carefully and choose the one that’s best for your current financial situation.

Should You Use BNPL?

Buy now, pay later can be an attractive payment option if you want to spread out the purchase price of items over time — especially when compared to high-interest credit cards. Even if you can afford to pay for an item in full at the time of purchase, using BNPL lets you hold onto your money longer and use it for other things.

The most important factor in deciding whether to use BNPL is making sure you can make the payments when they’re due. If you can’t afford to pay for something now and aren’t sure you’ll have the money in two, four or six weeks either, then using BNPL could get you into financial trouble. In this case, you might be better off using a credit card that allows you to rollover most of the balance from month to month, albeit with an interest charge.

Here’s one more factor to consider: Research has indicated that when consumers use BNPL, they tend to spend more money with a retailer. According to Affirm, BNPL increases the average order by 85% while according to Klarna, BNPL increases the average order by 41%. So if you think that using BNPL might tempt you to spend more than you need to, you might be better off not using it.

Give us a call if you have questions about buy now, pay later or any other aspects of using consumer credit wisely.

The commentary is limited to the dissemination of general information pertaining to Frontier Wealth Management, LLC’s (“Frontier”) investment advisory services. This information should not be used or construed as an offer to sell, a solicitation of an offer to buy or a recommendation for any security, market sector or investment strategy. There is no guarantee that the information supplied is accurate or complete. Frontier is not responsible for any errors or omissions, and provides no warranties with regards to the results obtained from the use of the information. Nothing in this document is intended to provide any legal, accounting or tax advice and Frontier does not provide such advice. This information is subject to change without notice and should not be construed as a recommendation or investment advice. You should consult an attorney, accountant or tax professional regarding your specific legal or tax situation.