‘Extremely troubling’: Expert warns against using ‘buy now, pay later’ plans for basic necessities
COLUMBIA, Mo. (KMIZ)
Buy now, pay later.
It can seem like a great deal for more than a quarter of Americans living paycheck to paycheck.
Make a purchase today, and split the cost over about four interest-free payments.
The “buy now, pay later” payment plan is growing rapidly in popularity as consumers face higher prices and tighter budgets. Recent data shows nearly half of Americans have turned to BNPL services.
And some statistics are startling experts like Jared Reynolds, CEO and founder of Freedom Wealth Planning in Columbia.
"The fact that it's getting into groceries and gas and just every little bitty consumer purchase online. That's seriously troubling,” Reynolds said.
According to LendingTree, 29% of BNPL users have used the loans for groceries. That’s up from 25% a year ago and 14% two years ago.
Reynold said the deferred payment option was always meant for larger, needed purchases, like in the case of a major appliance breaking.
"Good rule of thumb, if whatever it is you are purchasing is going to be used up before it is actually completely paid for, then absolutely you should not do this," Reynolds said.
Beyond long-term necessities, BNPL is now being used to finance basic necessities like food and transportation. He said short-term relief can cause deeper financial struggles.
“If I'm doing it for groceries that’ll be gone next week and I'm paying for them for the next three months, that's a compounding problem that is only going to get worse, ultimately to the point of default. And now comes all the major late fees, and even some of them, when you default, they will end up switching you to a loan. And the interest rates go as high as 36%,” Reynolds said.
There is something he’s noticed about these services as well. At a time when many people are struggling to make ends meet, BNPL is being advertised more than ever. He views it as predatory lending to a vulnerable population.
“They're embedding it into checkout lanes, like Klarna, Afterpay, Affirm. Gas stations. Fast food apps. And so that is where it becomes extremely troubling,” Reynolds said.
He expects regulation on BNPL services in the near future.
Many turn to the apps because most only do a soft credit check, allowing for approval of those with lower credit scores. Some don’t require a credit check at all.
In comparison to credit cards, Reynolds said BNPL can be a better deal for responsible consumers. It’s also a short-term installment plan tied to one purchase, rather than a revolving line of credit for multiple purchases.
“I think the upfront promise is real with the ‘buy now, pay later’ of ‘Hey, split it into three to four payments, zero interest.’ In that respect, especially if you can't afford to pay off the full balance on the credit card, those interest rates can be 22, 24, 28%,” Reynolds said. “So if it is something that you truly cannot afford to pay it off quickly, it can be a better option than the credit cards.”
A credit card will usually be the better way to go when wanting to build credit. Reynolds said most BNPL apps only report to credit agencies on missed payments, not on good ones. And late fees can be staggering.
"On a $40 grocery purchase, it could be a $10 late fee. That's 25% interest in a short term,” Reynolds said. “You don't get any of the benefit of 'building good credit' with this kind of structure. But you'll get all of the negativity of it."
Recent data shows that nearly half of BNPL users have paid late in the past year.
There are a few things Reynold’s said to consider when making a purchase through BNPL.
First, read the fine print. Find out what happens if a payment is missed and if the app reports that to a credit agency.
Second, understand your finances before accepting the loan.
”That kind of golden rule,” Reynolds said. “If I'm ultimately leaning on this, No. 1, I can't afford this.”
And lastly, don’t let plans stack up.
“I did it over here. I did it over here. Well, next thing you know, you have several payments coming out over the next several months,” Reynolds said.
According to LendingTree, 1-in-4 BNPL users have had three or more loans at once. Of them, 68% said that caused them to overspend.
In previous ABC 17 Consumer Alerts, ABC 17’s Haley Swaino has looked at gas myths and money savers, and ways to help you cut back on monthly bills.
