Advice | Why buying now, paying later can still be a debt trap (2024)

The concern is that consumers will buy more and spend more, the Consumer Financial Protection Bureau warned in 2021. With that in mind, the agency recently issued an “interpretive rule” that requires BNPL lenders to extend certain consumer protections that apply to credit card use, such as providing billing statements, crediting refunds to consumers’ accounts, investigating disputes and pausing payments while an investigation is ongoing.

The rule change, which takes effect this summer, is a good move by the CFPB for a financial product that gained popularity during the pandemic.

As inflation rose, many businesses began offering BNPL options to help struggling consumers, who have used the loans for essentials from groceries to gas.

A recently released Federal Reserve report on the economic well-being of American households found that 14 percent of adults used buy now, pay later in the prior 12 months, up two percentage points from 2022.

The Fed said more than half of BNPL users said it was the only way they could afford their purchase.

From 2019 to 2021, BNPL use skyrocketed: Loans originated in the United States climbed from 16.8 million to 180 million, and dollar volumes jumped twelvefold to $24.2 billion, according to a 2022 CFPB report that surveyed five large lenders.

Given the choice between piling more debt on a credit card with a double-digit interest rate, a BNPL loan product may be a better short-term solution. However, don’t just sign up and spend. Here are some pros and cons of buying now and paying later.

Fixed, short-term loan: A typical BNPL loan structure divides a $50 to $1,000 purchase into four equal installments, with the first payment due at checkout and the next three due in two-week intervals over six weeks.

A Bankrate survey found that 26 percent of BNPL users perceive this payment method as more responsible than using traditional credit cards.

Easy credit: Approvals are quick.

Younger adults — who may not have a long credit history and therefore have more difficulty being approved for a general purpose credit card — are more likely to have utilized buy now, pay later services, according to Bankrate.

BNPL made many strides online, and that means users skew younger, Bankrate senior industry analyst Ted Rossman said.

“I also hear a lot about debt aversion from young adults, which could be healthy,” he said.

Fees: If you have trouble paying, the fees, if there are any, aren’t horrible.

Many BNPL lenders charge late fees, often about $7 per missed payment on an average loan of $135, according to the CFPB.

No or small impact on your credit score: Providers typically do not report a consumer’s use of BNPL and subsequent repayment behavior to credit bureaus, according to a Federal Reserve Bank of Philadelphia report. However, this may change.

Earlier this year, Experian announced it would include Apple Pay Later loan information and payment on consumers’ credit reports with a BNPL designation.

“The information won’t be factored into existing traditional credit scores but may in the future as new credit scoring models are developed,” Experian said.

Overextension: If you aren’t careful, you can easily end up with several loans at one time.

The Bankrate survey found that 56 percent of BNPL users have experienced at least one issue while utilizing these services. The most common are overspending and missing a payment.

Interest: Not all BNPL loans are interest-free. The interest on longer-term loans can be as high as that of a credit card, Rossman pointed out.

Affordability is relative: When you live your financial life based on “affordable” installment payments, you may not realize you are shortchanging your future self.

What else could you do with that money? If you weren’t paying for that vacation trip, could you boost your retirement contributions?

Small-dollar payments can seem manageable, but are they really if they prevent money from being available for other important financial goals?

It’s still a loan: With its ease, BNPL may encourage financially vulnerable consumers to spend too much on discretionary purchases such as travel, dining out, concerts and retail products they don’t need.

“Some people think they’re doing a more responsible thing by paying in installments because they know exactly how much they owe and for exactly how long,” Rossman said. “If it’s interest-free, it could be better than making minimum payments on a credit card. But it’s still debt.”