4 Risks of Using Buy Now, Pay Later

The FTC has designated March 3-March 9 as National Consumer Protection Week! In recognition of that, this blog will provide information about Buy Now, Pay Later financing options.

If you’ve explored online shopping, chances are you’ve come across buy now, pay later (BNPL) options. You might have even utilized this method to purchase items, either directly through a retailer or via a dedicated app. While the convenience is undeniable, it’s essential to recognize the potential downsides. Below, we’ll outline four risks to keep in mind before opting for a buy now, pay later transaction.

1. Potential Confusion:
   • Despite its apparent simplicity, navigating buy now, pay later arrangements can become intricate, particularly when dealing with order cancellations or product returns.
   • BNPL loans typically involve a third-party provider rather than the retailer itself. This raises questions about whom to contact in case of refund issues— the store or the BNPL company.

2. Impact on Credit Score:
   • Defaulting on a BNPL purchase or missing payments could harm your credit score. While BNPL loan data hasn’t traditionally been reported to credit bureaus, recent developments indicate that this practice is changing. It’s crucial to scrutinize the terms and conditions regarding payment disputes when opting for a BNPL option.
   • Conversely, repaying a BNPL loan may not contribute to building credit until credit bureaus incorporate this information into credit reports.

3. Potential for Poor Spending Habits:
   • While buy now, pay later may appear less daunting than traditional credit cards, it still poses the risk of fostering unhealthy spending habits.
   • The seamless checkout process can facilitate impulse purchases beyond one’s means. While BNPL is marketed as a more lenient alternative to credit card debt, it’s essential to recognize that it still constitutes debt and can jeopardize financial stability.
   • Caution is advised when using BNPL for everyday purchases, as accumulating debt on non-essential items could lead to financial strain.

4. Limited Oversight:
   • Unlike the heavily regulated credit card industry, BNPL providers operate with comparatively less oversight, posing potential risks for borrowers.
   • The Consumer Financial Protection Bureau has cautioned consumers about the hazards associated with BNPL credit. While some providers may not impose interest charges, late fees and debt collection efforts could negatively impact a borrower’s credit score.

Understanding the Risks

Before proceeding with a buy now, pay later transaction, it’s crucial to grasp the potential risks involved. Many BNPL providers fees for late payments, and defaulting could result in the conversion of the initial loan into a high-interest one. Additionally, consider the implications for your credit score before making a purchase.

For more information about NCPW, click here to visit the FTC’s resources page.

For more tips about protecting yourself from fraud as a consumer, click here to visit First Bank’s Security Page!