As economic uncertainty grows, many households are increasingly worried about affordability and are turning to options like buy now, pay later. A recent survey shows that roughly one in four Americans have used these services to purchase groceries.
When it’s used the right way, it can be a simple, low-cost way to spread out payments and get what you need sooner. But if things don’t go as planned, you could end up with late fees or damage to your credit.
Let’s look closer at what is - buy now, pay later and what to watch out for before you use it.
Buy now, pay later isn’t like paying with cash or a debit card. It’s an installment loan that allows you to make a purchase immediately using borrowed money, then incrementally pay off the borrowed sum over a set time period. So even if it can be a cheap way to borrow, it's still debt.
One advantage of buy now, pay later is that lenders don’t typically perform a hard inquiry - so users can take advantage of the installment loan, with no impact on their credit score. Buy now, pay later is free if you pay on time. But if you fail to pay on time, you'll owe a late fee at the very least and, in some cases, interest. You need to remember to evaluate what you’re being offered, what’s the term, what’s the interest rate.
While spreading your costs over a number of weeks can help with cash flow, make sure you've always got a plan in place for repaying what you owe. And don't let it encourage you to overspend. Even if you can spread the cost of spending, you'll need money to repay the debt eventually, even if that's not immediately.
Payments are typically collected automatically from your card or bank account on scheduled dates, a bit like a standing order. You’ll usually get reminders in advance, so all you need to do is make sure the money’s there when the payment goes through.
Moreover, even when you do make on-time payments with a buy now, pay later service, this is typically recorded as a short-term loan and may decrease your credit score by lowering the average age of your credit accounts.
Overall, it’s important to remember that it’s safe to use a buy now, pay later service if you make all payments on time and in full. And remember to pay special attention to the fine print around interest and late fees.
If you remember that credit is a tool and you have discipline, knowledge and understanding your financial situation - then it can be an effective tool. If used responsibly, debt can be a powerful tool for consumers. But the problem with buy now, pay later is that it doesn't feel like debt. And if people use them routinely to fund purchases they couldn’t otherwise afford, they could end up with financial problems.
You might be able to afford a new refrigerator outright, but spreading the payments out can free up some cash in the short term. Just keep in mind that if debt pushes you to spend more than you planned, it’s usually best to avoid it.
