By Jack Pedigo – CNBC
Spending money you don’t have is now easier than ever.
Buy now, pay later (BNPL) services have been on the rise for years, with companies like Klarna, Zip and Afterpay offering interest-free payment plans for a range of purchases at partner merchants, from mattresses to products electronics, through sporting goods, clothing and jewelry.
Its applications work like markets full of big commercial brands with offers and, above all, with the message: You do not have to pay for your purchase today.
Apple already offers zero-interest payment plans on its products through Apple Card, but the company is adding a new BNPL option called Apple Pay Later, which will be connected to Apple Wallet.
Now, with the wireless touch of an iPhone, users can purchase non-Apple products spread over four payments over six weeks.
Tempting, isn’t it? It’s the idea.
A staggering 43% of Americans said they have used a BNPL service, according to an April 2022 LendingTree survey, up from 31 percent in 2021.
These services are also more popular with women, Gen Z (ages 18-25), and those earning between $50,000 and $74,999 a year.
College students and recent graduates, who make up Generation Z, tend to have little or no credit history and are generally less financially literate.
If poorly managed or overused, BNPL services can have drastic consequences on the already delicate financial well-being of a young consumer.
[Los solteros son mucho más vulnerables a los embates de la inflación y el alto coste de la vida]
As access to “buy now, pay later” loans becomes easier for consumers, it also becomes more important for consumers to “be their own filter and go through all the right steps they need to take to make sure they’re borrowing for the right reasons,” said Bruce McClary, senior vice president of membership and communications for the National Foundation for Credit Counseling.
If the hidden risks of BNPL loans are not known, these services can cause consumers more harm than good. Here’s what you need to know before considering using these types of apps.
When to use a BNPL application
Carefully review your personal finances before you sign to make sure the BNPL loan isn’t going to burden you with debt you can’t repay.
“It’s important to understand your financial situation and your ability to handle various types of loans before you jump into it,” said Matt Schulz, chief credit analyst at LendingTree.
The first questions to ask yourself are:
1) Is it a necessary purchase/one you won’t regret?
2) Is the “buy now, pay later” loan the only way to buy it?
3) Are you sure you can and will make your payments on time?
Usually, it is better to pay for purchases in full and not have an outstanding loan. It’s easier, less risky, and more financially responsible.
“If you have the money, if you can afford it, and if it’s not going to blow your budget, go ahead and pay the balance,” McClary said.
“It’s certainly less complicated than getting into some kind of multi-part payment plan,” he added.
If it’s a necessary purchase – say, a new mattress or a new computer – and you know you’ll be able to afford the monthly payments (make sure you know what those are before you buy the item), then a buy now pay later loan could be a good choice for you.
[Las tasas de interés en los préstamos bancarios dificultan cada vez más la compra de casas en EE.UU.]
You should avoid using the BNPL system to finance superfluous purchases you can’t afford and don’t need.
For example, if that designer bag you’ve always wanted is only available through debt, you may want to rethink that purchase.
“It just encourages you to buy things that you wouldn’t have been able to buy before,” said Maddie White, a fashion influencer with more than 2.6 million followers on the TikTok platform and an outspoken skeptic of the BNPL payment method.
“Even though you can buy it, that doesn’t necessarily mean it’s a responsible financial decision,” White added.
And consider this: An emergency expense, like a new mattress or computer, could come along and it can’t wait.
What if you can’t afford it because you’re still paying for that bag? Or maybe if you’re eligible for a second “buy now, pay later” loan, then you’ll have two gigantic bills on his head for the next year or whatever time?
[Tu dinero cuenta: Tres principios que hay que saber para elegir la tarjeta de crédito ideal]
Going a step further: What if you have all that outstanding debt and then lose your job?
You’ll see that racking up too much debt can be a slippery slope. The hidden risks of these loans could cause unnecessary damage to your financial well-being. If you have to order one, you’ll want to know that it’s manageable.
What happens if you miss a payment on your BNPL loan?
Nobody, of course, anticipates that they will stop paying when they opt for a BNPL service. But this happens more often than you think.
42% of consumers who have used a BNPL service have made at least one late paymentaccording to LendingTree.
When you take out that loan—and remember, it IS a loan, not just a purchase—it’s important to understand what will happen if you miss a payment.
“Even if you think you’re not going to get off track, you have to be prepared just in case, to understand the consequences you may face,” McClary said.
Most BNPL services charge a late fee or start charging late payment interest.
Afterpay says it will pause your account and not allow you to purchase anything else until you are up to date with your payments. In addition, failure to pay may affect your spending limit.
Therefore, make sure you read the fine print of the BNPL service before opting for it.
You should know if your BNPL activity will be shared with the credit bureaus, which affects your FICO credit score.
Unlike credit cards, not all BNPL loan payments are reported to credit bureaus. However, the different BNPL services – and even the different loans within these services – have different payment reporting rules.
Sometimes only BNPL late payments are reported, which could negatively affect your credit score.
And this can have a drastic impact on your prospects for applying for a credit card, mortgage rates and other loans.
“On the credit side, most of the time it’s down and there’s not a lot of upside,” Schulz said.
“These lenders don’t usually report good credit, but if you make a late payment, some lenders will report it. A single late payment can really damage your credit report.”
[Así puede evitar ser víctima de una estafa cuyo objetivo son inquilinos en busca de viviendas económicas]
With the increased use of BNPL loans, some credit bureaus are striving to collect as much data as possible about these loans.
Experian and TransUnion have already announced plans to include BNPL loan data in credit scores of consumers.
As a young consumer with little credit history, you don’t want these late payments to affect your credit score.
“It’s quite possible that there are young people who have nothing more on their credit report than a late payment on a ‘buy now, pay later’ loan,” Schulz said. “It’s hard to start building your credit from there.”
Is spending with BNPL loans too easy?
If using a BNPL service is easier for you than shopping or making large purchases, you may need to do a double-read and ask yourself: Are you overspending?
One of the main financial risks of these loans is that they can encourage you to spend much more than you normally would.
Almost 70% of consumers who have used BNPL services admit to having spent more than the account when using them.
“The goal with these credits is to overspend,” Schulz said.
“It’s important for people to understand that just because someone gives you money, it doesn’t mean you should accept it or can afford it.”
Social media platforms like TikTok and Instagram motivate overspending by amplifying the pressure for users to subscribe to fast fashion and other trends.
White credits viral trends for the uptick in BNPL use among young consumers.
“Social media contributes to how quickly the trend cycle turns around, and then when the trend cycle reverses, that encourages people to buy more stuff,” White explained.
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Many of these buy now pay later marketplaces entice you with their marketing on social media platforms, showing you how much you can buy now and pay later.
This relentless message, coupled with virtually unlimited access to BNPL loans, can make it alarmingly easy to overspend.
“Anyone with the right technology and account access can get started in minutes and get the financing they want, whether they can afford it or not,” McClary said.
“Imagine the amount of debt you can rack up in a matter of 30 minutes. It’s amazing.”
A silent accumulation of debt
In order not to spend more than necessary, it is essential to control BNPL loans.
If BNPL users do not budget these payments in their finances, a silent accumulation of debts.
“They ordered five things in the same week and all of a sudden a month later they have six payments and they can’t afford them,” White said.
“It’s not like opening your wallet and pulling out the cash and saying, ‘Oh, I only have X dollars left,'” said Carrie Rattle, CEO of Behavioral Cents and a financial therapist who specializes in compulsive spending.
“If financial education is not in the picture of the person who is buying, and is not adding all those payments that are going to be due in 15 days, he goes into debt.”
Despite the risks associated with BNPL, Rattle says that these services and their small loans at the point of sale can help young consumers become financially literate if they are used correctly.
Rattle points out that two critical skills for saving money are discipline and planning ahead, two qualities that are vital to keeping up with payments on these apps.
“If you stick to buy now, pay later, and actually pay on time, you’re already good at both,” Rattle said. “In that sense, if you can handle it, BNPL trains you to have great behaviors with money.”
Do you know the changing regulations?
Since BNPL applications are still relatively new to the fintech market, credit reporting standards and regulation are constantly changing.
The Consumer Financial Protection Bureau (CFBP) launched an investigation in December 2021 into BNPL services amid mounting pressure to regulate them.
Through a statement, the CFBP said: “The CFPB is concerned about the accumulation of debts, regulatory arbitrage and data collection in a consumer credit market that is already changing rapidly with technology.”
[Las rentas en EE.UU. siguen subiendo, por lo que muchos ajustan las finanzas familiares]
Even without federal regulation, BNPL services may have different rules about credit reporting and payment execution.
Be sure to follow the specific rules of your BNPL loan and keep up to date with any changes so you don’t end up in debt and with a lower credit score.
BNPL services were designed to benefit consumers, but if the risks are not taken into account, these deceptive loans can do the opposite.
Know your finances, understand your personal spending habits, and read the fine print on “buy now, pay later” loans. If buying BNPL sounds too good to be true, it probably is.