“Buy Now, Pay Later” promises simple payment plans that can make financing your next purchase easy and affordable.
These plans typically divide your total purchase into four equal, interest-free installments. The first installment is due at the cash desk and the other three are due every two weeks until the loan is repaid in full.
But even a simple payment plan can get messy when juggling three or four of them at once – a unique buy-now, pay-later problem that, unlike other forms of financing, doesn’t hold up. consider similar existing debts when extending an offer.
Know the risks of multiple purchases now, pay off loans later
Although some debt like credit cards and traditional loans are reported to credit reporting agencies, buy now, pay later loans are generally not reported, so lenders don’t know how many loans you have. ongoing and cannot assess your ability to pay more.
With the use of “buy now, pay later” plans exploding around the world, credit experts say that’s likely to change in the coming months.
Credit bureaus will soon work to increase the visibility of “buy now, pay later” on credit reports to better track loans between lenders, while protecting the credit scores of consumers who may be in for multiple ready in no time. and repay them successfully.
For now, borrowers can continue to borrow from multiple “buy now, pay later” providers. And while the plans may be advertised as free, the consequences of delay are anything but, said Marisabel Torres, a US-based nonprofit research and policy organization.
“There needs to be more transparency,” she said. “It’s not just ‘zero funding, zero fees’. If you miss a payment, you will be charged a fee. You will incur some sort of penalty.
While many “buy now, pay later” providers charge late fees, which can push borrowers further into debt, others send delinquent loans to collections, jeopardizing borrowers’ credit scores.
There are also consequences on the other side of the transaction. Even if a “buy now, pay later” provider doesn’t penalize you for being late, your bank might if you overdraw an account linked to the loan.
“Could you trigger insufficient funds charges or overdraft charges? Could you face banking consequences? These are very real consequences of not being able to meet the repayment of a loan,” said Torres added.
Budget for “buy now, pay later” payments
For borrowers who buy multiple times now and pay off loans later, the most important thing to do is plan your spending ahead of time, said Jordan Nietzel, a US-based certified financial planner.
If you’re not already following a monthly budget, start by reviewing your income and expenses over the past three months to identify cash inflows and outflows.
Assuming there is excess income that you want to spend on “buy now, pay later” purchases, set a total limit for what you can commit to monthly payments, instead of evaluating offers loan individually.
Nietzel suggested that it’s especially important to look at “buy now, pay later” loans as a whole, because small installments make debt more manageable than it is.
“We tend to think, ‘Well, that’s okay, I can definitely make that negligible monthly payment,'” he said. “You don’t realize that if you do this multiple times, those payments pile on top of each other.”
Resist the temptation to overspend
Budgeting can also help address one of the biggest “buy now, pay later” concerns: the ease of overspending at checkout.
Since “buy now, pay later” plans automatically split your purchase, it’s easy to lose track of what you originally planned to spend. For example, a purchase of $100 (approximately Dh400) becomes $25 (approximately Dh100) with a four-payment plan. For some shoppers, that might mean filling their shopping carts with more items.
“Buy now, pay later” vendors have little to gain from encouraging customers to push themselves. Since “buy now, pay later” providers do not charge interest and derive the vast majority of their revenue from merchant fees, they lose out if they encourage overspending.
Unlike credit cards which make money when people don’t pay on time, these payment providers lose money when people don’t pay on time.
However, financial planners and “buy now, pay later” vendors also note that large retailers’ willingness to pay merchant fees likely means consumers are spending more. If “buy now, pay later” plans are causing you to overspend on a regular basis, you better ditch them.
“It may seem easier on your cash flow, but in the long run you pay the same amount,” Nietzel said. “So if that forces you to buy more than you otherwise would have, that’s where it really becomes a problem.”