If you shop online, we’re sure you’ve seen Buy Now Pay Later (BNPL) payment options like Klarna, Afterpay, Affirm, Zip, and Sezzle – as you are checking out. For some, this might be an easy way to pay online and manage your budget – however, there are some risks and hidden fees you should be aware of before trying out a BNPL payment option.
What is Buy Now Pay Later, and how does it work?
BNPL is a type of payment deferment option, which typically allows the buyer to purchase an item with little to no money paid up front and remaining payments are made in installments. Items with BNPL options usually apply to clothing purchases, furniture, and electronics, and can range in price from $100 all the way up to a few thousand dollars. If you select this option during checkout, you’ll get an email with a payment schedule (usually about 4 fixed payments that you would either make bi-weekly or monthly until the balance is paid). Paying this way is often advertised as being quick, and with no interest or finance charges.
BNPL companies also don’t usually perform a hard credit inquiry when you apply to use this method as a payment option. They typically only will require that the applicant is at least 18 years of age, has a cell phone number, has either a debit or credit card currently, and that the applicant’s identity can be validated.
While this might sound easy and convenient – you do need to be aware of some hidden fees and read the fine print first.
Things to consider before using BNPL:
- Don’t financially strain yourself – While Buy Now Pay Later might seem like an easy way to pay for a big ticket item, you still need to be aware of your monthly budget and have a good sense of the money coming into your bank account. Even though you might qualify for this type of installment loan, can you actually afford to pay the amount they’ll be asking for by each payment due date?
- BNPL products often come with hefty late fees – These payment services are quick to advertise that they don’t charge buyers any interest, however if you miss a payment deadline – get ready to be hit with a pretty expensive late fee. In addition, you may also get blocked from making future purchases and have the late fees or failure to repay on time – sent to a debt collector or listed on your credit report. Late fees for BNPL can range up to 25% of the original order amount. Before choosing BNPL as a payment option, it’s always a good idea to read the disclosures and understand what you might be responsible for if you make a late payment. In addition, if you are paying the installment with a debit card or directly through your bank account and don’t have enough available to cover the payment – you’ll also likely be hit with non-sufficient funds fees from your financial institution. This makes your initial purchase, a very expensive one.
- Payment protection options – Another issue with BNPL is that you won’t find the same payment protections that you’d have available to you by using a credit card. Buy Now Pay Later does not have the dispute protections available that a credit card does when the item purchased is a scam, or if it arrives broken (or not at all). Returning items purchased this way can also be a hassle. The payment company may hold you responsible for the cost of the purchase, even if you returned the item – or it might take a very long time for a return payment to be processed. It’s also important to read through the return policies of whichever BNPL company you decide to use beforehand, since some may differ.
The moral of the story? For some shoppers, BNPL installment payment options may certainly be a beneficial and easy way to pay, and may work out just fine. However, before you decide to use this type of loan as a payment method – it’s important to carefully read through all of the terms and conditions, be aware of the company’s policies, have a monthly budget, and know what fees you could potentially get charged. In addition, because this is a relatively new type of loan – there aren’t as many protections in place for consumers. It’s definitely a good idea to be prudent and ensure that you fully understand all the terms of the loan before deciding to pay this way.