BNPL is a financing method that allows consumers to purchase items without paying the full amount upfront. It's a form of short-term credit offered by various companies worldwide.
The process is generally straightforward. After a quick application and approval, you can access funds immediately. Typically, an upfront payment of 25% is required, with the remaining balance divided into installments.
A unique advantage of many BNPL services is that they often don't check or report credit information. This makes them accessible to a wide range of people, though responsible use is crucial. Unlike traditional loans, smaller BNPL amounts usually don't affect credit scores.
Usually, BNPL providers request an initial payment of 25%, followed by three equal payments every two weeks, aligning with payday cycles. This structure can be beneficial for budget-conscious individuals. While most plans offer interest-free periods, missed payments can incur charges. Some providers extend repayment terms up to 48 months.
BNPL has become so widespread that it's integrated into popular platforms like Amazon, Apple, and PayPal. It's important to note, however, that despite their claims that the purchase is interest-free, late payments can result in additional charges.
Related: Buy Now Pay Later: What You Must Know About the Service
8 Things to Avoid with Buy Now, Pay Later Plans
Unfortunately, many people who use BNPL plans are already facing financial challenges. Missing even one payment can lead to interest charges, even without late fees. This means you could end up paying considerably more than the item's original price. Interest rates vary, but they can be substantial.
While these payment options might seem helpful for managing expenses, careless use can result in unexpected debt. In some cases, deferred payments simply do not justify the purchase. Here are eight purchases you should never make with BNPL to avoid potential pitfalls and maintain financial health.
1. Everyday essentials
As people become accustomed to using services like Afterpay, Affirm, and Klarna for larger purchases, there's a growing risk of relying on them for everyday items. Financial experts warn that this can lead to a harmful pattern of using credit for essential goods. Consistently using these services for everyday items can create a financial burden as you'll constantly be paying off previous purchases. It's better to manage expenses through budgeting and paying cash for necessities.
2. Clothing
Financial experts advise against using installment plans for clothing purchases. The convenience of spreading the cost can trick you into overspending on trendy items and causing regret later. A smarter approach is to implement a waiting period before buying clothes. This helps curb impulsive purchases.
3. Low-cost furniture
Financial advisors recommend avoiding installment plans not just for big-ticket items, but also for smaller purchases like budget-friendly furniture. This approach helps consumers steer clear of accumulating interest charges on purchases with minimal value. Since low-cost furniture is usually achievable with a one-time payment, installment plans provide little financial advantage. Budgeting for these items and repaying them in full will eliminate unnecessary interest fees and establish responsible spending practices within one's financial parameters.
4. Cars
It would be best if you exercise caution when using installment plans to purchase items that lose value over time, such as cars. If you're still paying off the car while its value drops, you could end up owing more on the loan than the car is actually worth. This financial predicament is a risk that many people overlook when tempted by the convenience of installment payments.
5. Phones
It's tempting to feel like you must have the newest iPhone, but financial experts advise against rushing to buy it, especially if you need to rely on installment payments. If your current phone still works, it's wise to keep using it. If it's time to replace your phone, exploring options offered by your phone provider might be more beneficial, as these providers often offer long-term interest-free plans compared to buy-now-pay-later plans.
6. Vacations
While going on a nice, well-deserved vacation is always a good idea, it's wise to avoid financing your trip with installment payments. Vacations are meant to be relaxing, not to create additional financial burdens. Knowing that you'll have to repay the trip after returning can hinder your ability to fully relax and enjoy your time off.
7. Impulse purchases
Buying something without thinking about whether you can afford it or truly need it is considered an impulse purchase. Online stores make it incredibly simple to spend money, increasing the risk of impulsive buying. Wait until you have the full price before buying something, ensuring that the purchase is worth your time and money.
8. Items you can’t comfortably pay off in four installments
Only use buy now, pay later services when you can repay the full amount within the interest-free timeframe, usually four payments. Otherwise, you risk paying excessive interest. For instance, Affirm offers four interest-free payments but charges up to 36% interest for extended repayment plans. This is significantly higher than the average credit card interest rate, which is around 28%. Similarly, Afterpay offers four-month installment plans and a longer-term option with interest rates up to 35.99%.
