Cons of buying now, paying later programs like Affirm and Afterpay
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Since finding out about the Buy Now, Pay Later, or BNPL programs two months ago, Erica Park has used them to fund purchases worth $ 700, including clothing, an air purifier. , a vacuum cleaner and a juicer. Installment plans made his self-proclaimed shopping addiction easier to justify.
“I can afford all of my impulse buys which is great. I should definitely save up instead,” said the 27-year-old Arizona resident. “I use it because it doesn’t make me feel guilty as it’s a small amount due up front and you instantly get the product.”
Park is far from alone in her enthusiasm for these programs. Check your favorite shopping websites and you will likely see the option to fund products using Affirm, Afterpay, Klarna, or one of the other BNPL companies; they have exploded in popularity over the past year, according to an industry study.
But buyers should be careful. While BNPL programs are convenient, they could lead to excessive expenses.
Typically, these programs allow customers to purchase products online and in certain stores, and spread the payments over a small number of fixed installments. But the terms for each of them, including interest, fees, and credit reports, differ, which can complicate things for clients who have to keep it all up on their own, says Charlotte Principato, services analyst. finance at Morning Consult.
Loans are heralded as alternatives to credit cards, which is why they are so popular among Gen Z and Millennial buyers who trust credit card companies less than (or are not) older generations. not yet eligible), according to data from Morning Consult. In fact, Gen Z use of BNPL programs increased 87% between April 2020 and July 2021, per Morning Consult.
If buyers make their payments on time, the programs can help them avoid high-interest debt, explains Principato. And business representatives tell CNBC Make It that they’re more user-friendly than credit cards by design. Klarna, for example, sends email and in-app reminders when payments are due, among other measures to avoid overspending, and Afterpay says 95% of payments never incur late fees.
But according to Park, while BNPL’s installment payments may seem low, it can be easy to rack up more than you can afford to pay each month. Although she can afford to pay her bills, she runs out of money at the end of the month for any kind of financial cushion, which can be stressful. And if you miss a payment, you will have to pay a fee.
“I’d be careful if you’re the type to abuse it, because it adds up,” Park says.
Check the conditions
BNPL programs are also popular because companies don’t do a credit check before they approve you. But it also means you need to exercise your judgment as to whether you can actually afford the payouts you sign up for.
“Just because you’re eligible for BNPL, or any other credit product, doesn’t mean you should use it,” says the Consumer Financial Protection Bureau (CFPB).
It is also important to understand what you are signing up for. The CFPB warns that consumers may not always understand the terms given to them, or the different terms between different programs.
Most BNPL companies don’t charge interest if you pay on time. But if you miss a payment, you’ll likely have to pay late fees, and what you owe could be sent to a debt collector, according to the company, according to the CFPB (Afterpay says it doesn’t).
And often these payments are taken directly from your checking account (although others can be placed on a credit card). If you don’t have enough funds available on the day your payment is due, you could overdraft your account.
Some programs have protections in place: Afterpay, which was recently acquired by Square, and Klarna, for example, will not allow consumers to make additional BNPL purchases until all payments are up to date.
BNPL programs also do not offer the same protections to consumers as credit cards, including chargeback rights. If you receive something that is faulty or does not match the listing, you may be refunded if you pay with a credit card. But this is not the case with all BNPL financing options, so you might have problems if your purchase is faulty or a scam.
But if consumers can keep track of their purchases and afford the monthly payments, BNPL can be a good alternative to credit. This is how Park sees it: when she couldn’t get a credit card, she turned to BNPL.
“I feel like Afterpay is a great way to feel you’re worth [loaning] money, “she said. But” it can also be dangerous because the costs of goods add up very quickly. “
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