5 Risks of Buy Now, Pay Later

Recently I bought a rug online. When I was paying, up pops an offer for Buy Now, Pay Later, or BNPL, as it's commonly known. BNPL lets you pay off your purchase in several installments—generally interest free—and still get delivery right away. While I've seen this type of offer many times, this time it made me stop and think.

This was a $1,200 purchase, and it might be tempting if I was in a cash crunch to spread my payments out over a few months. But what if it was a small purchase? Could I spread those payments out too? So I did a test, and crazily, I was given the same BNPL opportunity for as little as a $12 purchase!

I realize that creative financing opportunities have always been around. BNPL is a lot like the layaway plans of my grandmother's generation except that with layaway, you didn't get the item until it was completely paid off. 

I get that this type of delayed payment could be convenient. But with all the debt counseling I've done in my career, I also know that being able to put off paying can be a way to buy something you really can't afford—and get in way over your head if you're not careful.

Statistically, that seems to be what's happening. BNPL is hugely popular, with more than 39% of U.S. adults and over half of Gen Zers having used it at least once according to a recent Bankrate survey. Yet, the unfortunate reality is that BNPL is especially appealing to people in financial distress who have little credit history or bad credit.

That makes sense, since most BNPL plans are quick and easy to get. Generally, you put 25% down, then pay off your purchase in three future payments with no interest or fees. What's more, there's no hard credit check. But to me, it also raises a red flag. Because the easier it is to put off paying for things, the easier it is to end up in big debt trouble.

So while I understand the attraction of BNPL, I also want to raise some warnings about the potential financial pitfalls. Here are five risks to consider before you accept that next BNPL offer.

To me, the best way to buy something is to save for it until you have the money to pay for it. It gives you time to think about what you really need or want. But with BNPL, you don't have to wait, which makes it even easier to buy on impulse. Credit cards make it easy enough to overspend. Americans are currently carrying over a trillion dollars in credit card debt, according to the Federal Reserve Bank of New York. Add to that the possibility of having multiple BNPL plans, and before you know it, you're buried in debt.

So if you're going to use BNPL, be thoughtful about it. For instance, if you need a wardrobe upgrade for a new job, that could be a good reason. But don't use it to go on a shopping spree.

Whether you're trying to establish a credit history or improve bad credit, a BNPL plan won't likely help you. Most BNPL plans don't report to the three credit bureaus, so what you buy and what you pay is between you and the plan. It doesn't affect your credit score—unless you miss a payment. And that leads to the next risk.

Spreading out payments over time may seem smart at first. But what happens if you're suddenly caught short and miss a payment? Chances are you'll pay late fees. Multiple missed payments could mean multiple fees. You may even be charged interest on a late fee. But that's not all. Some BNPL plans do report late payments to the credit bureaus and may even turn you over to a collection agency. That can really hurt your credit score—and make it that much harder to get credit down the road for something important like buying a home or a car.

There may be downsides to credit cards, but the upside is they typically make it easier to return a purchase and get a refund. That's not always as easy with BNPL. In this case, you may have to contact the lender and possibly the seller directly—and there's no guaranteed refund. If you have a faulty product or something wasn't delivered, it's up to you to pursue it.

And what about the credit card perks like points or miles based on your purchase? BNPL plans don't reward you for spending.

Using BNPL for a large purchase could make sense. For instance, a computer or appliance can come with a hefty price tag, so why not spread out the payments to help manage your cash flow? But consider being especially careful here because not all BNPL plans are the same. Larger loans (and realize that it is a loan) sometimes come with longer terms and do charge interest. And those interest rates could be higher than what a credit card may charge. The problem is that it's easy when shopping online to click on an option before you realize exactly what it is. And once the purchase goes through, it can be a real challenge to undo it.

While these plans could be helpful in the right circumstances, consider how you use them. The best sounding deal can come with some hidden risks. I always say, the large print giveth and the small print taketh away. Read all the terms carefully. Know what you owe and when, especially if you have multiple BNPL plans. Understand what the impact could be to your credit score if you're late or miss a payment. Most of all, plan your purchases. Make sure the payments fit into your overall financial situation, and don't be late.

Bottom line? I still recommend the basic wisdom of my grandmother's generation: When you want to purchase something, plan, budget, and save for it—and buy it outright. You might find you appreciate it even more.