If you have done online shopping recently, you have probably noticed a proliferation of “Buy Now, Pay Later” companies. As the name implies, these companies allow consumers to buy something now and pay for it in the future. Usually, these companies split these payments into equal amounts, with the total sum paid back in 3-6 months. Effectively, these are short-term loans at some assigned APR.
While these platforms are tempting (especially the interest-free ones!), there are a few good reasons to avoid going down this road. Here are seven reasons to reconsider using one of these platforms.
1. Buy Now, Pay Later: What If Something Happens?
The most significant reason to reconsider using one of these platforms is perhaps the most obvious: what if something happens and you cannot afford to make the payments?
Consider the following scenario. You commit to buying a new guitar using a buy now, pay later service. The guitar costs £1,000, but the company will split the cost over four equal monthly payments of £250 a piece.
That all sounds good at first – £250 is much more palatable, and you get to use future earnings over those four months to make the payments instead of needing the £1,000 upfront.
Since the deal sounds good, you take it. Now, something comes up – say, your roof starts leaking. After some investigation, the roofer determines that you need a £10,000 fix.
That wipes out your savings and then some. You need to get another line of credit to cover the cost. The problem is, you already have the £250 monthly payment, so now you have this large monthly payment for the £1,000 item and the monthly cost of the £10k debt.
It’s easy to see how this could start a debt spiral. The payments you already need to make now potentially mean you need to buy more things on a buy now, pay later plan. Before you know it, you’re never paying anything off. You’re just constantly making monthly payments on things!
If you wait until you have the finances to buy something outright without financing, you’ll avoid getting into these debt traps!
2. Some Plans Have High Interest Rates or Penalties
Many (but not all) of these buy now, pay later plans are interest-free. Or, put another way, so long as you pay these plans as agreed, they are free of any interest. However, if you miss a payment or take too long to pay (in the case of deferred interest loans), you may incur significant interest charges and penalties. For example, it’s not uncommon to incur late fees for missed payments. These late fees can sometimes be quite substantial (in the UK, these fees are at most £12, but in the US and Canada, late fees could be as high as $30) and often mean you can no longer use the payment platform until you have resolved the debt.
Some plans do charge interest. Many of these interest rates are significantly higher than you would find with other credit products. You might find an APR of 20%, 25%, or even 30% with these services!
Therefore, if you are considering buying now and paying later, always check the fine print for fees and interest charges! If the fees are expensive and it is an item you can put off, consider doing so. If it’s not something you can wait for, you may wish to check to see what other loan options you have!
3. They Often Require a Credit Check
These buy now, pay later plans frequently require a credit check, too. Lenders’ checks when you apply for credit are called hard inquiries. For example, a hard credit check could lower your score by as much as 10 points in the United States. And hard credit checks will lower scores in the UK and Canada, too.
To be fair, typically, this credit check only happens at the beginning of the application process. After that, you’ll get some form of credit line, and you’ll be able to spend based on that. Still, if you have any major upcoming event where you expect that you might need pristine credit (e.g., purchasing a house), you probably don’t want to risk anything to take advantage of one of these buy now, pay later programs.
4. They Make Impulse Purchases Easy
Part of the reason to avoid these services is the very reason they exist – they make purchases too easy! It’s often much easier mentally to commit to paying £250 a month for four months than paying £1,000 upfront.
However, it’s worth taking a moment to consider why you wouldn’t pay the £1,000 upfront for the item. Is it worth £1,000 because it’s something you genuinely need, or is this item only worth £250 spread out over four months because it’s an impulse purchase and something you merely want?
If it’s the former, and you genuinely cannot wait until you have saved up the money (or perhaps it’s on sale at a steep discount), a buy now, pay later service may make sense. However, 90%+ of the time, the purchase falls into the latter category – it’s something you want to buy impulsively. If that’s the case, going into debt for the purchase is a bad idea. Instead, save for it, and if you still find you want it by the time you’ve saved for it, you’ll know it’s something you genuinely desire and that it is not impulsive!
Don’t give in to impulse purchases. These services make it easy, but the financial burdens will be with you long after the joy of the purchase is gone.
5. The Statistics Are Not on Your Side
Statistically, these loans are almost always a bad idea. One study found that a third of all buyers on these plans fall behind on payments. Additionally, over 70% of users stated that their credit scores declined after signing up for one of these plans.
These are sobering statistics and should give everyone considering purchasing something using one of these plans pause. A third of all buyers falling behind on these payments is a large segment of the population, which shows how hard it is financially to make room for these instalment loans.
Furthermore, with 70% of users reporting declining credit scores (a combination of the credit check and the instalment loan initially having a high loan-to-balance ratio), it’s also worth considering whether the purchase is worth the ding on your credit report. While you may not need credit now, life can change fast. There may be a credit card you want to sign up for, or maybe you finally decide to take the plunge a few months later and buy a house. While this scenario is unlikely, it’s not implausible either – if purchasing this item meant you couldn’t buy a home in a few months, would you still say the purchase was worth it? Probably not!
Ultimately, the statistics on these plans are not good. While you may be the exception, it’s worth keeping in the back of your mind when considering one of these plans.
6. These Payment Plans Have No Flexibility
Credit cards offer tremendous flexibility, although they may have higher interest rates.
Consider the following scenario. Two customers buy five things, each costing £1,000, for a total of £5,000.
The first customer puts these items on their credit card. The interest rate is high at 19.99% APR, but the minimum payment is only £150, 3% of the balance due.
The second customer puts these items on a buy now, pay later account. This account splits the purchases over six months. The interest rate is lower, at 9.99%, but the minimum payment is £857.58.
That’s a huge difference! But, let’s suppose the first customer wanted to pay their credit card bill in six months, just like the second customer will do with the payment plan. Since the credit card has a higher APR, the payment is £882.59.
For £25.01 more per month, the person that puts the purchases on their credit card has the flexibility of paying as low as £150 per month if they need to do so. If you lose your job, your investments go down, or you need to make an unexpected large purchase, the ability to scale down your payments could be a lifesaver.
Choosing the buy now, pay later approach adds up fast and could result in a significant cash flow crunch if something happens. Even those £50 over six months purchases become £250 per month if you have five going at once! And missing payments will damage your credit score for quite a while, so keeping your monthly commitments lower often makes more sense – you can always pay more if you have the good fortune of doing so!
7. Buy Now, Pay Later Programs Often Have No Rewards
Lastly, credit cards often have perks and rewards for using them. You can get cashback, travel rewards, and other incentives for putting a purchase on the credit card.
If you absolutely must make the purchase and you can get better rates with the buy now, pay later option, the better rates are probably worth more than the credit card rewards, but not always. And, if you are getting the same interest rate with one of these services (or a worse rate) than your credit card, why not get the points or cashback? Some store credit cards have high cashback rates that might even exceed the difference in interest rates.
Following the example above, suppose the person that bought £5,000 worth of goods did so on a card offering 5% cash back on the purchase. That’s £250 cash back to the person using the credit card and £0 back to the person who elected for the buy now, pay later service.
Recall that the APR of the credit card is 19.99%, so the person pays £5,295.33 total, including interest, if they pay £882.59 a month and they’ll be debt free in six months. The buy now option has a 9.99% APR, resulting in £5,146.69 in total payments.
However, the credit card person gets £250 cashback (5%). So they have an out-of-pocket amount of £5,295.33 – £250 = £5,045.33, which is cheaper than using the buy now, pay later service!
Bottom-line: as shown with the example above, credit card rewards programs can sometimes make it better to put the purchase on a card and treat it like a buy now, pay later plan, rather than opening up one of these actual plans and losing the rewards!
Buy Now, Pay Later: While Tempting, You’re Generally Better Avoiding It!
Buy now, pay later sounds tempting, but you are usually better off avoiding these programs unless you have no other choice (like you have an urgent repair on your home, and this is the only way to address it). They can have high interest rates, no rewards, no flexibility, and have the potential to wreak havoc on your credit.
Before committing to any of these plans, consider your other options (including not making the purchase). More often than not, you’ll find one of the other options much more palatable financially!