If you’re looking to make an online purchase, you may have noticed an additional payment option called "Buy Now, Pay Later." These services allow you to make purchases now and pay for them in smaller installments over time, like a layaway program. Sounds great, right? While this can seem convenient, it’s important to understand potential drawbacks. Let’s dive deeper into how these services really work.
How do "Buy Now, Pay Later" services work?
When you find something you’re ready to buy, instead of paying the full amount upfront, there may be a "Buy Now, Pay Later" option. You’ll get the item now, but you will pay for it over time. This could be weekly, bi-weekly, or monthly, depending on the terms you agree to.
Some "Buy Now, Pay Later" services may also require a down payment or have interest fees. Be sure to check the terms and conditions of the service to avoid any surprises.
What’s the risk?
Impulse Purchases
While the application for "Buy Now, Pay Later" services are simple, this could lead to more impulse purchases and financial strain since the payment isn’t upfront.
A good way to avoid impulse spending is to leave an item in your cart for at least 24 hours to see if it’s something you really want or remember later on.
Lack of Protection
Credit cards have options to dispute charges if your purchase wasn’t what you expected or was a scam. "Buy Now, Pay Later" services do not have the same protections, and you may not have the option to dispute your purchase.
Complicated Returns
Since you may not have fully paid for the item by the time you receive it, returns or exchanges with "Buy Now, Pay Later" services can be complicated. The company may require you to pay the total cost of the item until the return can be resolved with the original seller.
If you are buying items like clothing or shoes and may need to return the item, it’s best to purchase it with cash for an easier return process.
Impact on Credit
While "Buy Now, Pay Later" services usually don't affect your credit score directly, missed payments and late fees could harm your creditworthiness in the future. Some services will take a soft pull of your credit score to determine your eligibility. Every service is different, so be sure to check the terms and conditions.
Missed or late payments can negatively affect your credit score, while on-time payments may not necessarily improve it. According to Equifax, the way Buy Now, Pay Later payments are reported to credit bureaus is still developing.
If you’re considering using a "Buy Now, Pay Later" service, now may be a great time to create or review your budget. Relying on these services for purchases can mean underlying issues with financial planning and savings habits, potentially creating a bigger problem with managing finances. While you want to be disciplined and reach your financial goals, allocating a smaller portion of your budget can go to non-essential purchases or “wants” as long as you can pay for them in cash. Ultimately, adopting a save now, buy later approach is always a good idea.