‘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 instalments with zero interest. The first instalment is due at checkout, and the remaining three are due every two weeks until the loan is paid in full.
But even a simple payment plan can turn complicated when you're juggling three or four of them at a time – a problem unique to buy now, pay later, which unlike other forms of financing, doesn't look at similar existing debts when extending an offer.
Know the risks of multiple buy now, pay later loans
While certain debts like credit cards and traditional loans are reported to credit bureaus, buy now, pay later loans typically aren't, so lenders don't know how many loans you have outstanding and can't assess your ability to afford more.
With the use of ‘buy now, pay later’ plans soaring worldwide, credit experts opine how this will likely change in the coming months.
Credit bureaus will soon be working to increase the visibility of ‘buy now, pay later’ on credit reports to better track the loans across lenders, while still protecting the credit scores of consumers who may be taking out multiple loans in a short period of time and successfully paying them off.
For now, borrowers can continue taking on debt from multiple ‘buy now, pay later’ providers. And though plans may be advertised as no-cost, the consequences of falling behind are anything but, said Marisabel Torres, a US-based non-profit research and policy organisation.
“There needs to be more transparency,” she said. “It's not just, ‘zero financing, zero fees’. If you miss a payment, you will incur fees. You will incur some type of penalty.”
While many ‘buy now, pay later’ providers charge late fees, which can dig borrowers further into debt, others send defaulted loans to collections, jeopardising borrowers' credit scores.
There are also consequences on the other side of the transaction. Even if a ‘buy now, pay later’ provider doesn't penalise you for falling behind, your bank might if you overdraw an account tied to the loan.
“Could you be triggering non-sufficient fund fees or overdraft fees? Could you face banking-related consequences? Those are very real consequences that are tied to not being able to keep up with a loan payment,” Torres added.
Establish a budget for ‘buy now, pay later’ payments
For borrowers who take multiple buy now, pay later loans, the most important thing to do is plan your spending ahead of time, said Jordan Nietzel, a US-based certified financial planner.
If you don't already follow a monthly budget, start by reviewing your income and expenses over the past three months to identify how much money is coming in and going out.
Assuming there's a surplus of income 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 loan offers individually.
Nietzel suggested that looking at ‘buy now, pay later’ loans as a whole is particularly important since the small instalments make the debt seem more manageable than it is.
“We tend to think, ‘Well, no big deal, I can definitely make this negligible once-a-month payment’,” he said. “You don't realise that if you do that several times, those payments stack onto each other.”
Resist the temptation to overspend
Budgeting can also help address one of the top concerns about ‘buy now, pay later’: the ease of overspending at checkout.
Since ‘buy now, pay later’ plans automatically divide your purchase, it's easy to lose sight of what you originally planned to spend. For example, a $100 (about Dh400) purchase becomes $25 (about Dh100) with a pay-in-four plan. For some shoppers, this could mean filling their carts with more items.
‘Buy now, pay later’ providers have little to gain from encouraging customers to overextend themselves. Since ‘buy now, pay later’ providers don't charge interest, and make the vast majority of their revenue from merchant fees, they lose out if they encourage overspending.
Unlike credit cards that make money when people don't pay on time, these payment providers lose money when people don't pay back on time.
However, financial planners and ‘buy now, pay later’ providers also note that the willingness of major retailers to pay merchant fees in the first place likely means consumers are spending more. If ‘buy now, pay later’ plans tempt you to overspend on a regular basis, you're better off ditching them.
“It may seem like it's easier for your cash flow to stomach, but over the long haul you're paying the same amount,” Nietzel said. “So if it's causing you to buy more than you would have otherwise, that's when it really becomes a problem.”