Share on facebook
Share on twitter
Share on linkedin

How To Avoid The Pitfalls Of Buy Now Pay Later

When it comes to buying now, pay later options, there are a lot of benefits that borrowers can enjoy. These plans can help you get the things you need or want without having to wait, and they can also make it easy to stay on top of your budget. However, some potential pitfalls are associated with these programs that borrowers should be aware of. This article will discuss the catch with Buy now pay later and how it could impact your credit score.

What is Buy Now Pay Later?

Buy Now Pay Later is an agreement between a merchant and a customer that allows the customer to delay payment for purchase until a later date. The merchant offers the service as an incentive to complete a purchase. A BNPL provider is a company that provides the Buy Now Pay Later service. The provider usually has an agreement with the merchant to extend credit to the customer.

Consumers are increasingly looking for the payment option at the checkout when shopping online. However, BNPL is not yet regulated by the Financial Conduct Authority (FCA), which has deterred some from using it but may change as it has been subject to much scrutiny in the media.

How does it work?

A few different Buy now pay later options are available, but they all work in more or less the same way. You borrow money and then have a set amount of time to pay it back – usually somewhere between three and 12 months. Interest is typically charged from the date you take out the loan, so make sure you factor that into your calculations.

The customer can use any credit card, debit card, or payment method to take advantage of the BNPL services. The payment will not be included in their latest credit card billing statement. However, depending on the merchant’s terms, it will reflect on the following or succeeding statements. 

While some high-street shops offer this payment option, it is more common among online retailers. Additionally, it is often targeted toward families and younger people. Aside from banks, “buy now, pay later” third-party providers also offer packages. 

What are the benefits of Buy Now Pay Later?

The benefits of using Buy Now, Pay Later vary depending on the company you use. Generally, you can expect:

  • If you pay off your balance within the promotional period, no interest or fees.
  • A more extended repayment period than traditional credit products.
  • The ability to spread out payments over time. Link your payments to your debit card, bank account, and in some instances, a credit card. It may also be available at certain retailers offline.
  • Potential increase in credit score by using this type of product responsibly.

What are the risks associated with Buy Now Pay Later?

The risks associated with Buy Now, Pay Later, can vary from company to company. However, some of the most common risks include:

  • Interest charges if you don’t repay your balance in full by the end of the promotional period.
  • Accruing interest daily can add up quickly.
  • Fees for late payments or missed payments.
  • It can harm your credit score because on-time payments aren’t reported to the credit bureaus, but missed payments and defaults are reported. 
  • BNPL financing encourages consumer debt. Therefore, choosing the best BNLP package for your business is essential to ensure that your online store maximizes the benefits and lessens the risk. 

So, is buy now pay later right for me?

That depends on your circumstances. If you’re confident that you can repay the balance in full by the end of the promotional period, then buy now pay later could be a helpful way to spread out your payments and avoid interest charges. However, if you think there’s a risk you might not be able to repay the total amount on time, it’s best to avoid these products altogether.

The “disadvantages” only occur if the customer is not handling their finances well in the first place. To the regular consumer who can meet payment dates on time, this payment method can prove to be incredibly useful, and it is likely that even in the face of new regulations, we will see further fintechs continue to innovate using the BNPL model while also seeing increased adoption overall.

How do we avoid the pitfalls of BNPL?

There are a few things borrowers can do to make sure they don’t get caught up in the cycle of BNPL schemes:

  • Only use BNPL as a last resort. If you can afford to pay for something upfront, try to do that instead.
  • If you are interested in using a BNPL service, take the time to read the FAQs, terms, conditions, and fine print. This includes interest rates, fees, and any other applicable charges.
  • Check your credit score before applying for BNPL. This will give you an idea of how likely you are to be approved for a loan and what kind of interest rate you could expect to pay.
  • Pay off your balance in full every month if possible. This will keep your costs down and help improve your credit score over time.
  • Be aware of the risks involved with BNPL. If you can’t afford to pay back your loan, you could end up with a lot of debt and damage to your credit score.

Alternatives to BNPL

There are a few alternatives to BNPL that borrowers can consider:

Credit cards

Credit cards typically have high-interest rates, but they come with a host of other benefits, such as rewards and insurance.

Personal loans

Personal loans are unsecured debts that can be used for any purpose. They tend to have lower interest rates than credit cards, and the application process is more straightforward.

Home equity loans

Home equity loans are secured by your home equity, which means you’re less likely to default on the loan. However, they also come with higher interest rates.

Bottom line

BNPL can be a great way to finance big purchases, but it’s essential to understand the risks involved before signing up and always remember that you’re spending money that you don’t have yet. If you’re not sure whether BNPL is the right option for you, there are a few alternatives to consider. If you are interested in using a BNPL service, take the time to read the FAQs, terms, conditions, and fine print. If you want to get more value for your purchases, visit our Personal Loan program at EdFed.

Don't miss out!

Sign up to our mailing list to get updates on new products and content as they arrive.