Dubai: The ‘Buy Now, Pay Later" (BNPL) payment option, which allows consumers to purchase goods and pay in instalments, has become increasingly popular in recent years, but there is a growing concern that BNPL may be doing more harm than good, particularly when it comes to the state of your finances.
“BNPL services often promote the idea of immediate gratification, which can lead buyers to purchase items they can't afford. Since the payments are spread out over time, it may feel like a low-cost option in the short term,” said Andrea Barbara, UAE-based financial planner working with retail clients.
“This can lead to overspending, especially when consumers are able to use multiple BNPL services for different purchases, amassing debt across various platforms. This can further lead to a cycle of debt. Consumers might use BNPL to manage one purchase but then end up using it for additional items.
“If not carefully monitored, this can result in multiple, overlapping payment plans that become difficult to manage. As a result, individuals may find themselves paying off old debt while still accumulating new obligations.”
Here’s what happens after you choose to ‘Buy Now, Pay Later’. By selecting the BNPL method, you enter into an agreement with the BNPL provider. Under this agreement, you will pay for item on an instalment basis, perhaps up to a certain credit limit. But what happens at the back end?
The BNPL provider will then pay the full amount of the purchase to the retailer, either immediately after completion of the payment or after a certain period, deducting a discount representing the BNPL provider’s fees.
The BNPL provider will then collect the rest of the instalments from you. The retail merchant often has a contract in place with the BNPL provider, listing out the fees charged by the BNPL provider and detailing whether the retailer should be even partly liable for any instalment plans you may fail to pay.
Hidden fees, high interest rates, and more
While BNPL programs often advertise no interest for the first few months, missed payments or late fees can trigger high interest rates, sometimes as much as 30 per cent. Barbara added that these fees can quickly spiral out of control for those unable to make timely payments, leaving them with more debt.
Additionally, BNPL providers often does not report to credit bureaus unless a consumer misses a payment, said Dr. Khalid Essaye, an Abu Dhabi-based researcher who is specialising in consumer spending habits and trends.
“While this means no immediate harm to credit scores for those who make timely payments, it can also mean that consumers are not building positive credit history through responsible use. This could affect long-term financial health when trying to access other forms of credit or loans.”
Nearly 400 million shoppers use BNPL deals worldwide, but surveys reveal over 50 per cent of them do not realise they are taking on debt when doing so or did not think of these deals as a form of credit. Instead, most survey respondents describe BNPL as a “money management tool”.
“When spenders use BNPL as means to manage money, it is all the more reason to take caution as it meant they could unwittingly be exposing themselves to a range of potential problems if they failed to pay back on time, such as late fees, black marks on their credit report,” added Essaye.
You can use a BNPL app to make the purchase, or you may have BNPL options through your credit card. With BNPL, you can make a purchase at a participating retailer and opt for it at checkout. If approved, you make a small down payment, such as 25 per cent of the overall purchase amount.
Repayment, return policy risks to using BNPL
“When opting to go the BNPL route, you need to first understand the repayment terms to which you’re agreeing because BNPL financing is not as closely regulated as credit cards are. Terms can vary significantly,” said Abu Dhabi-based consumer credit analyst Zubair Shakeel.
For example, some retailers may require you to pay the remaining balance with biweekly payments over a month-long period. Others may give you three months, six months, or even longer to pay off your purchases.
“Understanding how your payments will work can help you plan for them in your budget. This ensures that you can afford your payments and make them on time. Missing a payment for a BNPL agreement could result in late fees.”
Shakeel also advised you to consider store return policies and how BNPL loans may affect your ability to return what you’ve purchased. “For example, you may be allowed to return the item, but you may not be able to cancel the BNPL contract until the return has been accepted and processed,” he added.
Key takeaways
BNPL, also known as ‘pay-in-four’ as borrowers often repay in four instalments, caught on as shoppers quickly got approved for a loan at the point of sale. So, people who can’t get a traditional credit card may qualify.
“BNPL borrowers pay no interest or fees if repaid on time. And unlike older payment plans, in which you had to pay in full before receiving an item, pay-later customers get their items right away. But even though most customers say they are satisfied, it has not always been smooth sailing,” added Barbara.
“The BNPL market – valued at $309 billion (Dh1.1 trillion) in 2023 and seen growing 25 per cent by 2026 – is lightly-regulated and there is rising concern among regulators and consumer advocates that the loans lack protections and that borrowers may be getting in over their heads,” said Essaye.
So, while this interest-free credit system has seen explosive growth, particularly among those with tight finances, Barbara agreed that BNPL shoppers should always track their payments and the exact amounts, schedule for completing payments and fees they might incur if a payment is missed.
