In the hustle and bustle of holiday shopping, the Buy Now, Pay Later trend helps cash-strapped shoppers buy more with less.
Like its name suggests, this kind of financing lets you make your purchase right away and worry about paying for it all another day. Plenty of retail companies offer this financing to encourage people to checkout their full cart without abandoning items. And it works — Buy Now, Pay Later financing increases e-commerce conversion rates by as much as 30%.
Shoppers can afford to buy more, even during the expensive holidays, because Buy Now, Pay Later financing — or BNPL, for short — provides a subscription-based payment model. Instead of paying for your shopping bill all at once, you can spread it out over four easy payments.
Does this model sound familiar? At its core, BNPL functions just like any personal installment loan, and like personal loans, it carries potential benefits and risks. It’s important to calculate the cost to borrow with BNPL financing just as if you take out an installment loan.
What Does Buy Now, Pay Later Mean?
BNPL financing is a point-of-sales loan that allows consumers to pay for their shopping cart in installments. Usually, shoppers must make their first payment upfront before paying off the remaining amount over a series of installments, usually four in total.
Unlike traditional layaway, BNPL means shoppers receive their items as if they purchase them upfront at the checkout. Consumers don’t have to wait until they make the final payment before their goodies are delivered. In fact, shoppers may be paying their purchases off weeks after they receive it.
Designed for ease and convenience while shopping, the BNPL industry is growing exponentially each year. In 2022, 360 million people used this financing, with experts forecasting these numbers to more than double by 2027.
Shoppers — many of them millennials and Gen Z — jump on the chance of using BNPL financing as a way to manage their cash flow. This option gives them the flexibility to spread out payments over time, without waiting to receive their prized purchase.
BNPL’s Similarities and Differences to an Installment Loan
We’ve already established that this consumer financing is a point-of-sale loan. It mimics an installment loan that you would take out in an emergency, with some subtle differences.
Like many personal loans, BNPL financing is unsecured, so you don’t need to provide collateral to be approved. Most BNPL services may only need to know you have a bank account and certain payment details. Others perform a soft credit check to get an idea of your past borrowing history.
If approved, the financing service arranges a payment schedule, one that usually includes bi-monthly or monthly payments. According to the Consumer Financial Protection Bureau, most services require users to consent to autopay, transferring their payments automatically by the due dates.
The biggest difference between this financing and a personal loan is that an installment loan typically comes with interest and finance charges. While there are some exceptions, most BNPL services don’t apply these fees for prompt payments. Late fines and possible credit damage may be on the books if you can’t pay an installment.
Why You Should Be Cautious When Using Financing
Without interest and other fees, BNPL financing may seem like a harmless way to defer payments, but studies show it gets many shoppers into tricky financial situations.
This financing style acts like a financial cheat code that disrupts the thought process behind shopping. Instead of deliberating the worth of a purchase, you can jump headfirst into shopping and go overboard.
Anything seems more affordable when you break its costs down into four payments, after all.
According to Consumer Reports, these smaller payments is how half of BNPL users wind up increasing their spending by over 40 percent when approved for financing.
Stacking is another common problem with this checkout option. The trouble here is if someone takes out multiple BNPL loans at once, considering only their individual payments. Looking at the bigger picture of their finances, the combined total of these payments may cost more than consumers can comfortably afford.
Paying for multiple installments to multiple services can overwhelm the average budget. Consumer Reports reveals as many as 43 percent of BNPL users admitted to making late payments.
According to CNN, those consumers who rely on this financing are far more likely to be “financially fragile.” Those consumers with the highest use of BNPL often have low credit scores resulting from a delinquency from a previous loan. Adding to your debt without a plan will only increase your problems if you fall within this category.
Bottom Line: Borrow with Intention
While Buy Now, Pay Later financing may not cost the same as a typical installment loan, it still functions as a loan in your budget. Treating it like one can help you take advantage of this financing without any of the downsides.
Legitimate online loan companies would never suggest you stack endless installment loans to handle your financial situation. So, why would you combine multiple BNPL point-of-sale loans?
Borrow only what you can afford without jeopardizing the rest of your budget. And if that means putting a pause on shopping or buying fewer gifts this holiday, so be it. This simple tip can help you celebrate the festivities without busting your budget.
