6 questions to ask before using buy now, pay later plans
Read, 3 minutes
Key takeaways
- Buy now, pay later plans can be a convenient way to break down the cost of big purchases over time—as long as you can afford the payments
- When using this type of plan, you pay a small down payment and then pay the rest in installments over time
- Read the fine print. Every company handles fees, credit checks and credit reporting differently
If you’re a frequent shopper, you may be noticing a new payment option when you check out at your favorite retailers. Buy now, pay later plans are becoming increasingly popular. These short-term loans, offered by a growing number of financial services companies, can make large expenses easier to afford. But if you’re not careful, they can also end up costing you money and harming your credit. Here’s what to consider before using one of these alternative payment plans.
How do buy now, pay later plans work?
Buy now, pay later is a payment option at checkout that allows you to make purchases and to pay off the balance in weekly, biweekly or monthly installments. As long as you pay on time, you usually won’t pay interest or fees. Though these payment plans may make it easier to manage more expensive purchases, keep in mind that you’re still taking on debt, in much the same way as when you use credit cards.
Can I afford to make the payments?
One of the most appealing aspects of buy now, pay later programs is you can get items immediately—even if you don’t have all the money to pay for them. But that convenience comes with the risk of being tempted to buy things impulsively or to spend more than you can afford.
It’s important to remember that buy now, pay later lenders may not perform a credit check before approving you, which means those lenders will not be aware of any other financial commitments you have. So, unlike when you’re issued a credit card, your ability to afford payments hasn’t been assessed. That means it’s up to you to keep yourself from getting overextended. Plan your spending and stick to your budget.
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What happens if I miss a payment?
This is a situation in which buy now, pay later plans can get costly. Many providers charge late fees that can increase to as much as 25 percent of your initial purchase. They might also block you from using their plan in the future. And some lenders may transfer your account to a collections agency or report late payments to credit bureaus, which can hurt your credit score and your ability to get favorable terms on future loans. Fees and penalties vary among plan providers (some don’t have any), so make sure you read the fine print of the loan agreements.
34% of buy now, pay later users have missed payments
Source: Credit Karma/Qualtrics survey, August 2021
Quick tip
Before you use a buy now, pay later plan, it’s important to have a repayment strategy including considering any buy now, pay later agreements you’ve already committed to. A simple way to make sure you pay on time is to enroll in automatic payments, by using a debit card, credit card or bank account. If the payment is being withdrawn from your bank account, make sure you have enough money in your account on the payment due date.
How much will I pay in interest?
One particularly attractive aspect of many buy now, pay later plans is that you won’t pay interest if you make your payments on time. However, if you miss a payment and still have a balance after the date of your last installment, you could pay a rate that’s higher than the average credit card rate on the remaining balance. And plans that allow more time to pay—up to 36 months in some cases—tend to charge interest. If your plan does charge interest, the proposed rate will be disclosed at the sign-up stage, so be sure to read the fine print.
Quick tip
A credit card with an introductory APR of 0% is another way to get short-term, interest-free financing. An added advantage: using the card responsibly can help you build a good credit record, which could be helpful in your pursuit of future financial goals. You can also ask your financial institution about other options like short-term, low-cost loans.
Will my credit be affected?
The short answer is that it might be. Buy now, pay later providers generally don’t report payments to credit bureaus, so you can’t get a credit-score boost for paying on time. However, some report missed payments, which could hurt your score. The only way to know how individual plans interact with credit bureaus is to read the loan terms.
Some companies, especially those offering longer pay-back periods, may do a hard credit check before approving your loan. If so, that can negatively impact your credit score. Keep in mind that every buy now, pay later loan that gets reported to the credit bureaus could show up as a separate account on your credit report, even if they’re all through the same provider. That could significantly lower the average age of your accounts and hurt your credit score.
72% of buy now, pay later users who missed payments say their credit scores fell afterward
Source: Credit Karma/Qualtrics survey, August 2021
What consumer protections apply to my purchase?
Buy now, pay later loans don’t have the same consumer protections as credit and debit cards do. If you find a billing error, buy something that’s broken or get caught in a scam, you could still be held responsible for the total cost. And returns can be more difficult: the loan provider may require that you continue making payments while the return is being processed. Again, check the loan agreement before you buy to make sure you understand specific return policies.
