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"Buy Now - Pay Later" Services Offer Interest-Free Financing.

"Buy Now - Pay Later" (BNPL) can, in its simplest form, be described as "layaway, but you get to take the item home right away." This service is being offered by a wide variety of sources as well as app companies.  Some of these are finance companies, with Paypal, American Express and Chase being the biggest names in the market right now. But most of the options are unique apps that each partner with certain retailers: Affirm works with Walmart and a number of other retailers, Klarna works with Macy's, Afterpay works with a number of popular clothing retailers, and so on.

BNPL is very appealing as an interest-free alternative to a credit card purchase and it can be used by someone with bad credit scores. You can buy an item instantly with a small partial payment, and as long as you make the scheduled payments you won't be charged any more than the purchase price, and this is the biggest opportunity of a BNPL program.

So what's the downside? It's the amount of extra money you'll end up paying if you fail to make those scheduled payments. These services combine interest rates that are comparable to the most unfavorable credit cards with some very hefty finance charges and late fees. And, as with credit cards, missing payments can hurt your credit rating.

How "Buy Now - Pay Later" Services Work

BNPL services can be a bit confusing due to many reasons. First of all, there is not yet one company, bank, fin-tech company or provider that just lets you shop anywhere you like (unless you're getting a BNPL option through a credit card you already have). What you generally have to do is figure out what store you want to buy from first, and then see if the store partners with one of these services. Note that Paypal is the BNPL provider that most stores use.

Buy Now - Pay Later is basically a low-risk gamble for the store you're buying from. At worst, they'll get the full purchase price eventually from most people. But at best (for them), you'll start missing payments and end up being forced to pay a much higher price in fees when all is said and done.




At the consumer end, the terms are actually very favorable provided you're 100% sure you can make every payment on schedule. Even the best credit cards only offer a year or so of 0% interest when first signing up for them. There really isn't another deal quite like it, and you can see why consumer interest in it is high (and why stores are rushing to partner with one BNPL app or another). Many of the BNPL companies also offer other technology programs that help consumers, such as free apps that help you budget.

But the devil is in the details. BNPL providers often offer very long financing periods, some ranging up as far as 39 months with no credit check required. The longer the repayment period, the more opportunities for you to miss a payment and get socked with a fee. These longer periods are also generally not interest-free beyond the first several months.

"Buy Now Pay Later" Fees and Charges

The Buy Now - Pay Later fee system is very similar to that of a credit card. Pay off the agreed-upon statement amount during each billing period, and you pay no extra money and in effect the service is free to use. This is why it can be a good option for people with poor credit. Miss one of those payments, and you're in for some heavy financial penalties from their programs (and potentially damage to your credit).

There are some key differences in these programs and app companies though, however. One is the billing period. It may be monthly, but it's just as likely to be biweekly. That means more payments to keep on top of.

Another issue is the late fee if you miss a payment. Most BNPLs charge a flat fee, and these are comparable to credit card late fees (about $29 to $39 for each missed payment, though this can add up quicker if you're missing payments every two weeks). There are some exceptions, however. For example, Afterpay charges an initial $10 late fee when the first payment is missed, but will then tack on another $7 per week as long as the payment is not caught up (with an eventual maximum of 25% of the initial purchase price). Some also tack on an added "finance charge" in addition to the late fee – however Paypal does not charge any interest for their BNPL program.





With the exception of Paypal, the interest rates from the apps are comparable to credit cards ... bad ones, that is. The sort that you get when just starting out without a credit history, or for rebuilding bad credit. BNPL interest rates tend to run from about 24% to 30%, which doesn't compare favorably with the 24% to 25% you can expect to pay for the worst entry-level credit cards. But they do provide guaranteed credit, including for applicants with bad credit scores. Paypal in one of the apps that will offer more interest free financing rates for BNPL.

Other Potential Pitfalls of Buy Now - Pay Later

Since BNPLs generally don't require credit checks and are available to just about anyone, including borrowers with bad credit. Therefore they present a strong temptation to make impulse purchases. This is a positive in that it can be a form of credit for people with bad credit scores or the millions of “unbanked” in this country. Find other prepaid cards to build credit for the unbanked.

However there is a major risk with that. Buyers who have issues with impulse control or financial planning may make a major purchase on a whim, not worrying about how things will work out in the long term.

The long repayment periods that BNPLs offer also tempt you by breaking down the regular payments into amounts that seem very small. However, as the past year has shown, you never know how things might change or what sort of financial catastrophe might come up. The longer you're on the hook for payments, the more opportunity there is for some sort of event of this type. You might suddenly find yourself unable to pay for several months, which turns that initial good deal into a financial nightmare as you watch the interest and fees pile up.

And just because BNPLs don't ask for a credit check and they are guaranteed to be available, that doesn't mean that they won't report late payments or defaults to the credit reporting agencies. BNPLs rarely do the sort of "hard" credit check that results in a decrease to your credit score, but some do a "soft" pull and use your FICO score as criteria for approval of the financing or for your overall authorized purchase amount.

Finally, be aware that BNPL purchases can be very difficult to return. In addition to the retailer's own return policy, you will also have to meet the conditions of the BNPL lender. Those terms tend to be more stringent as BNPLs exist in an emerging "grey area" of the law in which little existing regulation applies directly to them. The retailer's return process may not line up with the BNPL return process in a way that allows you to provide necessary documentation or take the required steps, or you may be disqualified if you get anything out of order.







Being Cautious With BNPLs - But There Are Advantages

BNPLs can be a useful financial tool if you're certain that you need a big-ticket purchase as they can provide you time to pay the bills, with 0% interest rates in the meantime. But you need to be reasonably confident that you can meet the repayment schedule without taking on late fees and without racking up too much interest (setting up automatic payments helps out quite a bit). Buy Now Pay Later services and the apps in the marketplace can also be a good option for individuals with either no credit history or low credit scores.

However, always be mindful of the risks of using BNPL companies. In particular, Buy Now Pay Later comes with fees if you miss a payment. They can also get you into trouble if you tend to make impulse purchases as the small monthly payments are a strong temptation to overextend your spending.


By Jon McNamara

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