A lot of us have seen how expensive credit cards can get. If you can’t pay your full balance by your due date, you end up paying sky-high interest rates.
“By now, Pay later” offers an alternative to cards that feels just as easy, with some of the same benefits. So how does it work? What’s the downside? Is “Buy now, Pay Later” as smart as it sounds?
How does ‘Buy now, Pay later’ work?
Buy now, Pay later, often called BNPL, got its start online, with e-retailers looking for an edge. If you’ve never used BNPL before, it’s seductively easy: at check out, you’ll often see one or more BNPL options along with the usual credit cards. The most popular BNPL providers are Affirm, Klarna, PayPal and Afterpay.
When you select one, the BNPL provider pays the retailer for your purchase, then works with you to get installment payments over the weeks ahead. For most BNPL services, you’ll pay installments on a weekly, bi-weekly or monthly basis.
For most, there’s no interest charged or hidden fees as long as you stay the course and make payments on time. But if you miss a payment, expect major penalties. Some charge high interest on your full purchase (not just the remaining balance) as well as late fees. Your credit score will also take a hit.
Big penalties loom
In a report last year, 38% of BNPL users missed at least one payment, and 72% have seen their credit score drop as a result, according to a Credit Karma report.
"Buy now, pay later is the new version of the old layaway plan, but with modern, faster twists where the consumer gets the product immediately but gets the debt immediately too," said Rohit Chopra, the bureau's director.
Most BNPL services don’t require a credit card to sign up. Just your name, date of birth and address. You’ll get assigned a credit limit, like you do with any credit card, and a clear schedule for when payments are due.
Some BNPL services offer discounts with partner retailers. But they don’t offer the perks often gained with credit cards, like cash back on purchases, flight discounts and upgrades or access to special services and events.
Despite the pros and cons, BNPLs are on the rise. In 2021, 51% of consumers say they use one, according to a recent report, and owed an average of $883 on BNPL. In 2022, more brick and mortar stores are adding BNPL payment options. The total purchases made through BNPL amounted to close to $100 billion in 2021 with the expectation it will reach $1 trillion by 2025.
Let's spell it out
Look at the pros and cons of BNPLs:
- Easy set up: no credit check required
- Installment payments, instead of the full price up front
- No interest charges with on-time payments
- Lots of online retailers accept BNPL
- High interest charges when you miss a payment, often on the full purchase price
- Late fees on missed payments
- Lower credit score with missed payments
- Easy access to credit can be hard to manage
Why Gen Z loves BNPL
Millennials' use of BNPL has more than doubled since 2019, whileGen Xers' adoption more than tripled. But according to a recent survey, 61% of Gen Z consumers have already started using buy now, pay later, an age group that’s raised some government eyebrows.
In December, the Consumer Financial Protection Bureau opened an inquiry, asking BNPL firms to explain their data use and borrowing practices. As of now, the services don’t face the regulations traditionally lenders face.
And for new credit users like Gen Z shoppers, they may not be aware of the risks. And they might be caught off guard when their student loan repayments resume in May. Many of them may have taken on BNPL debt without budgeting for their student loan payments too.
Bright can help you save more and keep you financially stable.
How Bright can keep you on track
Are you a fan of Buy Now, Pay Later? Has it changed the way you use your credit cards?
While Bright doesn’t make payments to Buy Now, Pay Later services, we can pay off your credit cards fast.
Our MoneyScience™ AI studies your finances and analyzes your debt, looking at your balances and interest charges. Bright makes smart credit card payments for you, always on time and optimized to pay off your cards faster. Bright also adjusts as your finances shift.
If you don’t have it yet, download the Bright app from the App Store or Google Play. Connect your bank accounts and credit cards, set a few goals and let Bright to work.