The Risks of Buy Now, Pay Later Programs

It's convenient to delay payments, but you could end up with unexpected costs

Illustration of a gold coin that is cut in half to show a clock. Illustration: iStock

As the holiday shopping season shifts into overdrive, more and more consumers are opting for buy now, pay later plans, which let you spread out your bill payments over additional weeks, usually with no interest or fees.

The payment plans are offered by a growing number of retailers, including Amazon, Shopify, and Walmart, both online and in stores. The typical installment arrangement might let you put down 25 percent of the purchase price, then make three equal payments over six weeks.

To provide these options, many merchants have teamed with financial technology companies such as Affirm and Klarna. But banks, credit card issuers, and payment services, including American Express and PayPal, offer their own flexible payment plans.

About one-third of shoppers have used buy now pay later (BNPL) financing, according to a recent survey by Lending Tree, an online lending marketplace. Of those who opted for such financing, 62 percent said they had done so five times or more, and 81 percent said they would do so again.

“Those are remarkable numbers for a relatively new product. Consumers love it, and it’s likely here to stay,” says Matt Schulz, chief industry analyst at Lending Tree.

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But there are financial risks to choosing a BNPL plan, especially if you miss a payment.

According to a recent study by Credit Karma, 34 percent of consumers who used BNPL services fell behind on one or more payments. Of those, younger shoppers were far more likely to fall behind, with more than half of Gen Zers and millennials reporting they missed a payment vs. 22 percent of Gen Xers and just 10 percent of baby boomers.

Late payments can result in fees or even put you on debt collection lists depending on the terms of the BNPL provider. The Credit Karma survey found that 72 percent of those who missed a payment said they thought their credit score dropped as a result. One out of three in that group said their credit score declined significantly.

Those penalties may come as a surprise to some consumers, who may lose track of their payments or use more than one BNPL plan. The terms of the providers often differ, with some charging late fees or reporting to credit bureaus, while others don’t.

“Consumers don’t always understand how these loan programs work or what help they can expect if something goes wrong,” says Chuck Bell, a financial policy advocate with Consumer Reports.

Those concerns recently prompted the Consumer Financial Protection Bureau to open an inquiry into the business practices of five leading buy now, pay later providers. The inquiry requires the companies to provide information about the debts being accumulated by consumers, the dispute-resolution protections available, and the use of consumer data.

So before you opt for a buy now, pay later plan, carefully consider these guidelines.

Go to Consumer Reports’ Holiday Gift Guide for updates on deals, expert product reviews, insider tips on shopping, and much more.

Take a Hard Look at Your Spending

Your BNPL lender may allow you to spend as much as $100 or even $1,000 in one shot, but should you really? As the Lending Tree survey found, two-thirds of consumers said they typically spent more using these plans than they would if they had to pay the full amount at the time of purchase.

Before you click “buy now,” look closely at your budget and your income to figure out how much cash you have coming in to cover your payments. 

Once you understand your spending limits, make sure you stay on track, perhaps by keeping a list of planned purchases. And earmark an account for those future payments. 

“You want to make sure you really have the money set aside for those bills when they come due,” says Marguerita Cheng, a certified financial planner in Gaithersburg, Md.

Watch Out for Gotchas in the FAQs

“These pay-later services come in all types, some with fees and interest charges and some without,” Schulz says. “It’s easy to get confused, especially if you sign up with more than one lender.”

So check the terms of the loan on the lender’s website, which are usually spelled out on a support or FAQ page, or call to ask. Is there a late fee that’s imposed automatically? Can you get it waived if you pay just a day late? Will late or missed payments be reported to a credit bureau, possibly hurting your credit score?

Be sure you’re getting the rules for the specific type of loan you plan to use, because some lenders provide more than one type of financing program.

Set Up Automatic Payments

Research last year by Cornerstone Advisors, a banking consulting firm in Scottsdale, Ariz., found that consumers can easily lose track of their BNPL payments. One reason is that these bills are short-term and are due biweekly rather than monthly, which can lead to confusion.

Some consumers may also view the late fee as a minor cost, but that can defeat the purpose of using these programs, says Ted Rossman, an industry analyst at CreditCards.com.

Say you end up paying $30 in late fees on a $100 item. That effectively raises the price of the item by 30 percent. If you don’t have enough money in the bank to pay that bill, you may get hit by a $35 overdraft fee on top of that.

The most foolproof way to avoid these costs is to automate the entire process. Schedule regular payments through your bank account or card.

You can also set up text or email reminders when payments are due. Some lenders do this automatically.

Stick With Trusted Retailers

Unless you’re spending a small amount that you won’t miss, an installment loan program isn’t the best way to try out a new product or service, especially now, when supply-chain problems and shipping delays abound.

“If you’re using a buy now pay later plan, you probably want to stick with well-known retailers with track records for delivering on time and responding quickly if there’s an issue with your purchase,” Rossman says.

You may also want to think twice about using these plans for travel arrangements, such as buying airline tickets, Bell says, especially when dealing with online travel booking sites. You may come up against inflexible refund policies if your travel plans change or are canceled.

Consider Using a Credit Card Instead

While point of sale loans can be convenient, you may be better off in the long run if you use a credit card, as long you can pay off the full balance on time.

“By using a credit card, you can build a good credit score, which is important for your overall finances,” Schulz says. Your purchases may also qualify for rewards, such as cash back or discounts, which can boost your budget.

You also have stronger consumer protection when you use a credit card. In addition to investigating disputed charges, some issuers offer purchase protection that will cover your costs if items are damaged or stolen.

Having help when you need it can be well worth making a payment sooner rather than later.

Editor’s Note: This article, published originally on November 30, 2021, has been updated to include information about a recent Consumer Financial Protection Bureau inquiry.