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'Buy now, pay later' plans: The hidden risks you need to know

These plans generally don't charge interest like normal credit cards, but that does not always mean they are a better option.
Posted at 7:44 AM, Jan 05, 2024

With spending up this past holiday season and record credit card debt right now, more and more shoppers have been turning to "buy now, pay later" options as we start 2024. But BNPL, as it is becoming known, could lead to a major money hangover for some people as they try to pay their bills this new year.

That's because what seemed like a good idea a month ago, during the holiday shopping frenzy, could have your bank account in the red by February.

Jana Parmalee tried buy now, pay later last year and says the results were not good.

"It's a trap," she said.  "It's just never-ending. You are constantly buying now and paying later."

Ted Rossman, senior industry analyst for Bankrate, says it is easy to fall deeper into debt if you are not careful.

"I think some people view it as a more responsible form of debt," he said. "But I would just underscore that it is still debt.”

Pros and cons of buy now, pay later

He says buy now, pay later programs like Klarna, Affirm and Afterpay are booming in popularity as a credit card alternative for younger shoppers. In most cases, no credit check is required, unlike a credit card. Plus, there are no interest charges to build up, as they often do with credit cards.

But Rossman says BNPL can lead to complacency and bills that add up fast.

 “Sometimes you can trick yourself," he said. "You say it's not a $200 purchase anymore. It's just four easy installments of 50 bucks.”

But if you have multiple plans running, he warns, it’s easy to fall behind on payments.

In fact, the Consumer Financial Protection Bureau found that nearly 43% of pay-later users have overdrawn a bank account in the last year.

 “Be careful, think about that total cost of ownership,” Rossman said.

If you miss your payments, you could face late fees and be sent to collections, he cautions, without any protections from the credit card industry. Those are two of the reasons Rossman recommends you don’t make a habit of using these programs, especially for discretionary spending on things you don't absolutely need.

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There are times when BNPL can be helpful.

 “The best option for buy now, pay later," he said, "is partitioning a single large expense away from the rest of your finances,” such as a needed home improvement.

Otherwise, you could be singing the blues if you let these payment plans pile up on top of each other.

"If you forget about it, it can get pretty bad," one shopper told us.