The buy now, pay later (BNPL) option seems to be all the rage at present, and has been made available by multiple companies. But while it can be a convenient way to make purchases and get the things you need without using a credit card, it can also become a financial headache if you aren’t careful. Falling behind on payments can mean late fees and possibly even a dip in your credit score if the problem isn’t fixed quickly.
It can be easy to think that BNPL is free money to use on everything you want and need, but the truth is that BNPL is still credit and needs to be used responsibly.
Listen to this week’s episode of the rich & REGULAR podcast about some of the pitfalls of these products, and keep reading below for ways that planning ahead can help you avoid problems in the first place.
Know the risks
The buy now, pay later phenomenon is growing rapidly. According to a recent NerdWallet survey, 37% of respondents used BNPL services in 2021, and 12% of those borrowers used the service at least five times within the last year.
While it can be a convenient option that may work better for younger people than a credit card or even serve as a helpful bridge between paychecks, it is still debt, with all the problems that come with it. So while using BNPL isn’t inherently wrong, it’s essential to know the pitfalls before you sign up.
If you use a BNPL service, make sure you read the fine print, avoid taking on debt for wants or large purchases you can’t pay back, and understand the repayment time frame and circumstances.
Many think they’ll quickly pay the required monthly payments on time and in full, but if you don’t have the money now, are you sure you’ll have it next month? Depending on what you’ve purchased, those payments could be quite large, and it’s essential to have a plan to pay it back before you click ‘buy’ so you don’t get into trouble.
Instead of buying something and then figuring out how you’ll pay for it, consider delaying the purchase, creating a spending plan and being thoughtful about the items you need.
Like most things in life, having a plan can be the difference between making conscious choices that work for you in the long run and regret. While it can be fun to have something new and give yourself a treat every once in a while, if you have to use credit to do it—i.e. credit cards or BNPL companies—it may be worth rethinking your purchase.
Instead of relying on credit to meet your financial needs, consider doing the following:
Make a budget
When the lure of something shiny catches your eye, consider how it will fit into your monthly budget. While everyone deserves to splurge now and again, be sure it is genuinely a splurge and not a pattern of thoughtless purchasing.
If you have a little left over every month, consider moving that amount into a savings account so that you already have the money readily available when you see something exciting. It is much more fun to make a purchase outright and know that the item is yours with no strings instead of experiencing that sinking feeling when you see the bill come due.
Save for big purchases
If there’s something expensive you want, like the latest technology or a piece of couture clothing, consider creating a separate savings account just for that item or category.
Many online banks will allow you to create multiple savings accounts. You can have a bucket for your emergency fund, vacation spending, vet and medical costs, car repairs and even a fund for your next big purchase.
You may even find that as time goes on, you lose interest in the item you desperately wanted. It’s better to find out you didn’t actually want it before spending the money rather than feeling regret and shame afterwards.
Remember, it’s still debt
If you do find yourself needing to use a BNPL service, it’s okay. It can be a helpful tool if you need to make a necessary purchase and can’t wait to build up your savings account.
Many companies offer interest-free payments on BNPL, which might entice you to spend more. Remember that there’s no such thing as free money, and keeping a handle on your spending and credit usage is essential. Make sure you have a plan to pay off the BNPL on time so that you don’t incur any fees or potentially affect your credit score.
BNPL can be a good option for people who need a bridge between paychecks or have a plan to pay off their purchases on time and in full. Avoid accumulating too much debt via a BNPL service by ensuring you don’t go crazy with impulse purchases and that you only use the service as a backup to help you when you need it most.
Instead of worrying about how you’ll pay back a buy now, pay later scenario, focus on saving for big-ticket items, creating a splurge section of your budget and only accumulating debt when necessary.