Weighing the pros and cons of Buy Now Pay Later (BNPL) apps

If you shop online, you’ve likely come across Buy Now Pay Later (BNPL) apps. The appeal is right there in the name. Using a BNPL app is a convenient way to purchase items without paying the full amount upfront. But while BNPL apps like Klarna, Afterpay and Affirm make it easier to manage expenses in the moment, they also come with potential financial risks. Let’s explore the benefits of BNPL and pitfalls to maintain your financial health.

What are Buy Now Pay Later apps?

Buy Now Pay Later apps allow you to make a purchase by splitting the cost into manageable payments over time, often with little to no interest if paid within a specified period. This option has become increasingly popular, especially among younger shoppers who may not have access to traditional credit.

These apps are now widely available across various industries. Whether you’re shopping for clothes, booking a vacation or buying electronics, BNPL services are often presented as an option at checkout.

The appeal of BNPL services

It’s simple. BNPL apps are easy to use and very accessible. Unlike traditional credit cards, which may require a lengthy approval process and hefty interest rates that can quickly add up, BNPL services are a straightforward way to spread out the cost of purchases, often without additional fees.

These services offer a breath of fresh financial flexibility to shoppers who would otherwise be limited by what they can afford at the moment. It can help shoppers maintain their spending habits even during a tight month.

The pros:

BNPL services offer several advantages that contribute to their growing popularity.

• Convenience: BNPL apps make financing purchases quick and easy. The application process is typically fast, and approval is often instant.
• Interest-free payments: Many BNPL apps offer interest-free installment plans, provided payments are made on time.
• Budget management: For some, BNPL services offer a structured way to budget expenses. By breaking down payments into smaller amounts, users can better manage their monthly cash flow.
• Increased purchasing power: Simply put, BNPL apps allow you to buy items you might not be able to afford upfront. This can come in handy during limited-time sales or when making larger purchases.

The cons:

When it comes to your finances, always consider the flip side of the coin. The convenience of using BNPL apps does carry significant risk.

• Overspending: Deferring payments can be a slippery slope leading to overspending. It’s easy to lose track of how much you’ve committed to pay over time, which can result in financial stress.
• Accumulating debt: The use of multiple BNPL services can lead to the accumulation of debt if not managed with extreme caution. Missing payments can result in late fees and penalty interest rates, creating a snowball effect.
• Impact on credit scores: While most BNPL loans, typically small and short-term loans, have not been reported to credit bureaus, some of the larger and longer-term BNPL are reported. Recently, there has been growing scrutiny around BNPL services, and discussions are underway about potentially reporting more BNPL loans to credit bureaus in the future.¹
• Lack of consumer protection: With traditional credit cards, consumers are protected in cases of fraudulent transactions or disputes. BNPL services are not always subject to the same regulations when it comes to protecting users.

Using BNPL responsibly — it can be done!

Check out these hints to help you avoid the potential pitfalls of using BNPL apps.

• Set spending limits: Establish a budget for how much you can afford to spend using BNPL services each month. Resist temptation and stick to it.
• Understand terms and conditions: Read that small print! Make sure you fully understand the terms and conditions, including any fees, interest rates and payment schedules before you select the BNPL option.
• Stay on track: Treat BNPL payments as seriously as any other financial obligation. Missing payments can result in fees and potentially impact your credit score. Consider setting payment reminders.
• Use BNPL sparingly: It’s easy to get overwhelmed by multiple payment schedules, so focus on managing one or two purchases at a time.
• Consider alternatives: Before using a BNPL app, consider whether you can afford to pay for the item outright with your debit card or if a different financing option might be more appropriate.

Alternatives to BNPL

While BNPL apps can be convenient, they’re not the only option available. Look at traditional credit cards or draw responsibly from a savings account. Even layaway plans, a deferred payment plan popular in days gone by, are still offered by some sellers and may be better suited to your financial needs. Assess your situation and choose the payment method that best aligns with your long-term financial goals.

BNPL responsibly.

The purchasing power offered with Buy Now Pay Later apps can either supplement or threaten to sink your budget. To enjoy the benefits of BNPL, make sure to understand the service you are working with and follow best practices for responsible use.