The risk of overspending with buy now, pay later apps

Buy now, pay later (BNPL) as a payment option is available seemingly everywhere. From department stores to airline tickets, you can make payments on small and large purchases with the convenient payment model. But as simple as it seems, buy now, pay later can be a slippery slope if you lose track of how much you’re spending and how much your monthly payments become.

Here’s more about the risk of overspending with buy now, pay later apps.

BNPL loans spread out big expenses

BNPL loans make large expenses more manageable by allowing you to make payments over time. However, like with any large expense, if your financial situation ever changes, keeping up with payments may become difficult.

Additionally, overspending is likely when you fail to consider the overall cost of ownership, including any late fees or interest incurred with the purchase of an item. Making smaller payments on big expenses can make it seem like you’re paying less, but you’re likely to be paying more over the long run.

Aside from the convenience of small payments, some who have used buy now, pay later apps like Klarna, Affirm, and PayPal Pay in 4/Pay Later, report issues such as missing payments, difficulty returning a purchase for a refund, and even regretting the purchase. Do your due diligence and read the terms and conditions before accepting a BNPL plan. Interest often isn’t charged on BNPL loans until you miss a payment; some lenders may also require you to pay backdated interest if you do.

Credit cards, though more difficult to qualify for and often with much higher interest rates, offer an alternative form of credit for making large purchases. Depending on the credit card, you may even take advantage of benefits such as extended warranties and purchase protections. However, because of the aforementioned high interest rates, it’s even more important that you’re aware of the total cost of ownership for any item purchased with a credit card that you might make payments on, like you would with a BNPL option.

Recent changes in reporting could affect your credit scores

Earlier this year, FICO announced that it would begin including buy now, pay later loans in Americans’ credit scores. For those who use BNPL responsibly, this could be good news, helping to bolster their credit scores. But for those who are among the 16% who reported missing payments in Bankrate’s BNPL survey, this change could negatively affect their credit score.

FICO will now consider the amount of debt owed through buy now, pay later loans when calculating credit scores. This can increase or lower your credit score, which could affect your ability to get future credit. For example, if you miss a payment and wind up paying interest, that could leave you with an even bigger debt than you initially signed on for — and a lower credit score. Keep future large expenses in mind, such as mortgages or auto loans, before making a purchase with a BNPL loan.

Always check your budget before using a BNPL loan

There’s no way to ignore the convenience of low monthly payments for a large expense. But as with any purchase, particularly those that will add to your recurring bills, always calculate what your payment will be and check that your budget and income can handle the additional expense before making a purchase.
And to make sure you avoid missing or late payments, know when your payments are due and set up automatic payments from your checking account each month.