If you have noticed a lot more "buy now, pay later" apps popping up when you check out with online retailers, it's because they've become increasingly popular. Buy now, pay later (BNPL) apps are the hot new way to do - as they say - buy things now and pay for them later.
You'll often find these apps -- think PayPal Credit, Affirm, Klarna, and Afterpay -- at the checkout page of your favorite online retailer. They offer you a way to pay for your purchase over a series of monthly installments, often "interest-free."
Unfortunately, a recent study found that only about 1 in 5 consumers who use these apps actually understand how they work. This lack of understanding can lead to unexpected fees and damaged credit.
How do buy now, pay later apps work?
The most common payment plans let shoppers split their purchase into four equal installments to be paid every two weeks, with the first due at checkout.
So, those $100 sneakers are only $25 today, and another $25 every other week for 3 weeks. You may even get an additional discount for using the app. Sounds like a good deal, right?
Maybe. If all payments are made on time, then this small loan is interest-free and you scored a good deal. But, forget to make a payment or don’t get it all paid off before the promotional period ends, and you could be paying up to 30% in interest, plus a late fee. Definitely not a good deal anymore.
Advantages of BNPL apps
In most cases, BNPL apps offer good deals -- as long as you pay off your balance on time. Paying in full is the only way to be sure you'll avoid late fees and interest charges. Try using the Pay Now feature to get access to lower prices on the items you want without financing. If you can't afford something up front, it's wise to put money into a savings account each week or month until you have enough to buy the item rather than use credit.
The convenience of these apps is undeniable. They don't require any separate applications or processing times. The payment options are built in with many online retailers, so it's almost as easy as entering your credit card info.
Disadvantages of BNPL apps
BNPL will rarely improve your credit, but it can hurt it. In most cases, your on-time payments aren't reported to the credit bureaus, so you won't be building a positive credit history as you would with a credit card. However, they may report missed or late payments. And if you fail to pay, your debt can be sent to collections, which can seriously damage your credit score.
If you are only making minimum payments on your credit cards, it’s not a good idea to take out another loan. Especially if you will eventually use your credit card to make the payments on these apps. That designer bag is cute, but do you really need it? Skip the purse and add that amount onto your credit card payment instead.
When you choose a payment plan, the apps automatically bill your debit or credit card, meaning it’s easy to overdraw if you don’t know how much money is available in your account.
BNPL offers could save you money. However, it's crucial to both your bank account and your credit score that you make sure you can afford the agreed-upon payment schedule.