What to consider before using ‘buy now, pay later' services when online shopping
The 'buy now, pay later' trend is increasingly popular, particularly among younger shoppers and those with limited access to traditional credit sources.
These services, now a common feature at online checkouts, offer a blend of convenience and easy access to credit, but experts caution that these seemingly attractive plans are not without their risks.
Ted Rossman, a Senior Industry Analyst at Bankrate, explains that these services are a modern take on traditional financing methods.
"Maybe it's just for easy payments of $50. It's kind of a new twist on the old layaway or infomercial kind of financing method," said Rossman.
This easy accessibility of credit is what makes these services appealing to many consumers, but Rossman points out crucial factors to consider.
"Traditionally, these plans have been outside of the credit system. That's starting to change. They are starting to appear on credit reports. If you don't pay, you could be charged a late fee. It depends on the provider," he warned.
A recent Consumer Financial Protection Bureau report highlights that while many users manage 'buy now, pay later' services without financial strain, they are often the same people who have credit cards, personal, or student loans.
Furthermore, these users are more likely to exhibit signs of financial distress, such as high debt, revolving credit card balances, or delinquencies, compared to those who don’t use these payment options.
Rossman also notes a shift in the payment installment periods of these services.
"So maybe it's not just for interest-free payments over six weeks, but maybe it's a year or two years. That's probably going to carry an interest rate, though. And sometimes it's at or even over what a credit card would charge," he explained. The average credit card interest rate is exceeding 20%.
Another concern Rossman raises is the tendency of these services to encourage overspending.
"Sometimes this encourages overspending because you break it into little installments. You kind of don't realize the total cost of ownership," he said.
The process of returns and exchanges can also become more complex when dealing with these third-party services.
"Pay later is that returns and exchanges are not always easy because there's that middleman involved. Sometimes it takes some follow-up to get your money back. So that can be a complication," Rossman added.
If you're considering 'buy now, pay later,' take a moment to evaluate your financial situation.
Read the terms carefully, understand the payment schedule, and consider whether the purchase is necessary.
