In contemporary shopping experiences, you may come across the option to participate in a buy now, pay later scheme when making a purchase. While the proposition may appear appealing, it is crucial to familiarize yourself with all the considerations associated with this type of arrangement. To provide a comprehensive understanding, we have sought insights from various financial experts who will elucidate the fundamentals, empowering you to make an informed decision regarding the suitability of buy now, pay later for your circumstances.
Understanding the Concept of Buy Now, Pay Later
Michael Hershfield, the CEO of Accrue Savings, provides an explanation of the buy now, pay later concept, stating that it allows consumers to divide their total purchase into equal payments, with the first installment being due at the time of checkout. However, Hershfield points out that similar to credit cards, these applications often impose interest charges, which increase the risk of accumulating debt.
The Mechanism of Buy Now, Pay Later
When shopping at retailers that accept buy now, pay later (BNPL) services, Ronita Choudhuri-Wade, a personal loans expert at NerdWallet, explains that during the checkout process, you will be presented with the option to split your total purchase into smaller payments, rather than paying the entire balance upfront. Choudhuri-Wade notes that you may be required to provide personal information such as your name, address, email address, date of birth, phone number, and Social Security number, along with a payment method. Subsequently, the BNPL provider may conduct a soft credit check, which does not impact your credit score, and can approve your application within seconds.
The specific plans offered by BNPL providers may vary, but Choudhuri-Wade mentions that many providers adopt a “pay-in-four” or “pay-in-six” model. Under this model, your purchase is divided into equal installments, with each installment due every two weeks. The first payment is typically due immediately upon checkout. For instance, if you have a pay-in-four model and your total purchase is $300, you will pay $75 at the time of checkout and then make three additional payments of $75. As long as you make all payments on time, your purchase will be paid off within six weeks, according to Choudhuri-Wade.
Pros and Cons of Buy Now, Pay Later
Advantages:
According to Choudhuri-Wade, one advantage of buy now, pay later (BNPL) is that it allows you to divide a larger payment into smaller, more manageable installments, often at 0% interest. Additionally, the application process typically involves a soft credit check, which means there is no negative impact on your credit score.
Disadvantages:
However, consumers should be aware of the drawbacks associated with BNPL plans. Ted Rossman, a senior industry analyst at Bankrate.com, points out that these plans can lead to overspending by obscuring the true cost of the purchase. For example, a $200 purchase divided into four easy installments of $50 may not feel like a significant expense. Nonetheless, Rossman emphasizes that the costs of these plans can accumulate, especially when multiple plans are active simultaneously. Late payments can result in additional charges and potential damage to your credit score. Rossman also highlights that returns can be problematic with BNPL, as there have been cases where the provider still expected payment even after a purchase was returned. Involvement of intermediaries can add complexity to the process.