Hidden Risks of Buy Now and Late Payment Plans | BNPL

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1. Be realistic about the expenses. Your BNPL lender may allow you to spend up to $ 1,000 all at once, but that doesn’t mean you should.

So take a look at your budget and income to understand how much money you will have available.

Once you understand your spending limits, make sure you stay on track, perhaps by keeping a strict list of planned purchases. And reserve an account for these future payments.

“You want to make sure that you really have the money set aside for those bills, when they come due, says Marguerita Cheng, certified financial planner in Gaithersburg, Md.

2. Check the pitfalls in the FAQ. “These late payment services are still the Wild West – they’re of all types, some with fees and interest and some without, says Matt Schulz, chief industry analyst at Lending Tree. “It’s easy to go wrong, especially if you sign up with multiple lenders. “

So check the loan terms on the lender’s website, which is usually shown on a support or FAQ page, or call and ask. Are late fees charged automatically or can you benefit if you pay one day late? If you miss a payment, are you excluded from future purchases? Will late or missed payments be reported to a credit bureau which could affect your credit rating?

Make sure you get the rules for the type of loan you are using, as some lenders offer more than one type of financing program. Affirm, for example, offers variable term loans, and terms and interest rates may vary depending on the retailer and your credit profile.

3. Configure automatic payments. As Cornerstone Research has shown, consumers can easily lose track of their BNPL payments. One of the likely reasons these bills are short term and are due every two weeks rather than monthly, Shevlin explains. Juggling multiple loans can add to the confusion.

Some consumers may also view late fees as a minor cost, but they may defeat the purpose of using these programs, says Ted Rossman, industry analyst at CreditCards.com.

Suppose you end up paying $ 30 late fees on a $ 100 item, which effectively increases the price of the item by 30%. If you don’t have enough money in the bank to pay this bill, you could be hit with an overdraft fee of an additional $ 35.

The most surefire way to avoid these costs is to automate the entire process. Schedule regular payments through your bank account or card.

You can also set up SMS or email reminders that payments are due. Some lenders do this automatically.

4. Do not use for obscure retailers or travel. Unless you’re spending a small amount that you won’t miss out on, an installment loan program isn’t the best way to try out a new product or service.

“If you’re using a buy it now, pay later plan, you’ll probably want to stick with well-known retailers with a history of on-time delivery and quick response to any issues with your purchase,” says Rossman.

You may also want to think twice before using these plans for travel arrangements, like purchasing airline tickets, says Chuck Bell, the attorney for Consumer Reports. When dealing with online travel booking sites, in particular, you can run into inflexible refund policies if your travel plans change or are canceled.

5. Consider using a credit card instead. While point-of-sale loans can be convenient, you might be better off in the long run if you use a credit card, as long as you can pay off the full balance on time.

“By using a credit card, you can achieve a good credit score, which is important for your overall finances,” says Schulz. (Learn smart strategies for improve your credit score.) Your purchases may also qualify for rewards, such as cash back or rebates, which may increase your budget.

You also have enhanced consumer protection when you use a credit card. In addition to investigating disputed charges, some issuers may offer purchase protection that will cover your charges if items are damaged or stolen.

In these uncertain times, it can be very beneficial to have extra help in the event of a problem.

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