Risks of Buy Now Pay Later Program

Posted by Matin Varshochi in Personal FinanceNovember 4, 20225 min read
Key Takeaways
  • The Buy Now, Pay Later (BNPL) service is a new payment method that has become increasingly popular.  
  • An issue that has risen from the BNPL is that many people are using it to buy items they can’t afford or pay back in the near future. 
  • Statistics show that the majority of BNPL users are Gen Zers.
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The Buy Now, Pay Later (BNPL) service is a new payment method that has become increasingly popular. Despite BNPL becoming more widespread amongst the younger generation, this program carries significant financial risks if the money isn’t paid back on time. 


How Buy Now, Pay Later Works

Suppose a person wants to purchase a new laptop for $1,000. When a person wants to buy an item but does not have the money in their bank account at the point of sale, they can pay for it using the BNPL program. The customer will typically pay around 25% of the final purchase price, $250 in this case, and the rest of the money, $750, is financed.

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Typically, when the repayment period is short, these payments will be made interest-free, which benefits the user. However, if the loan is for a more significant amount that takes longer to pay off, such as a year, then it could be subject to high-interest rates if a person fails to make a payment on time. 


Some people may use the BNPL instead of a credit card to purchase to avoid credit card debt and the high-interest rates associated with it. Also, since BNPL allows for interval payments, this appealing feature has played a role since it makes repayment more affordable. 

Rising Issues of Buy Now, Pay Later

The main issue arising from BNPL programs is the encouragement of overspending. When you use your debit card, you know how much money is leaving your bank account and the amount left over. As a result, seeing your current financial position will help determine whether you can make more purchases. 

However, since BNPL plans offer loans, the younger generations, especially Gen Z, feel as though they can afford to purchase an expensive item since there will be loans to cover the remainder of the purchase price. 

According to LendingTree, 58% of Gen Zers have used BNPL in the past, meaning nearly 60% of this generation has financed at least one purchase. This generation is more likely to use BNPL than others because of the extensive social media promotion. These BNPL companies target the younger demographic, and their advertisements promote the usage of their brand to purchase expensive items now, which can be paid for later on. 


man trying on watch buy now pay later program

Image Credit: DuxX / Shutterstock.com


Consequently, those deceived by these marketing campaigns began using the BNPL to purchase items they may not have needed. As a result, those who have excessively used BNPL services to purchase items are now between a rock and a hard place, financially speaking. Furthermore, since using BNPL causes periodic payments to be made by the user, those who have stretched their money thin will have difficulty trying to make these payments on time. 

Recommended Read: The Financial Deception Caused by Social Media


The Consequences of Overspending

Debt Affects Your Credit Score and Credit History

Firstly, since BNPL programs require periodic repayments, people must make these BNPL payments on time to avoid a stain on their credit history. To make matters worse, in the fine print of some of these BNPL companies, they mention that any late payments made may be reported to the credit bureaus, Equifax, Experian, and TransUnion. 


When these late payments are added to a consumer’s credit report, it can negatively affect their credit score, meaning that applying for future credit cards and loans will have a more challenging time being approved. 


credit score credit report payment history

Image Credit: ssguy / Shutterstock.com


Interest Rates


Another negative impact of overspending is the interest rates the BNPL companies will charge. If your BNPL plan is short-term, there is a lower chance that an interest rate will be associated with your late payments. However, according to NerdWallet, if your loan was for a longer period,  you may be subject to interest charges of up to 30%. 

These high-interest rates make it extremely difficult for a person to get out of the debt cycle, and it could cause continuing financial strains for years to come if misused. 

How to Prevent Misuse of Buy Now, Pay Later Loans

The main reason people who misuse BNPL end up in a poor financial situation is that they do not budget their money. People who fail to take the time to understand how to improve their financial situation will, unfortunately, run into money problems down the road. 


couple budgeting and making a financial plan for their family

Image Credit: Ground Picture / Shutterstock.com


Recommended Read: How to Create a Basic Budget in Three Simple Steps


Track Your Income and Expenses


Knowing your monthly income and expenses is the best way to prevent misusing the BNPL program or any other financial assistance. When you know how much money is coming in, and how muh is going out, you can better understand whether you can afford the monthly payments of the BNPL program.

Non-Essential vs. Essential Items

People who purchase impulsively and use the BNPL to afford a non-essential item will ultimately do more harm than good for their financial situation. Thus, before you acquire anything with a significant price tag, wait around a week and see if you still want to buy it. 

Matt Schulz, Chief Credit Analyst at LendingTree, It’s important to know your financial situation and capacity for managing multiple types of loans before you jump into these things.” Schulz reiterates that knowing your financial position before deciding to take on additional debt is crucial to not messing up your credit score and financial situation. As a result, before you purchase anything using the BNPL program, determine whether this purchase is necessary and if you can afford the monthly payments. 

The Money Wrap-Up


Although BNPL can be helpful if used effectively, the problem is that not many people do their financial due diligence before deciding to participate in this program. Since BNPL has been gaining much traction, the Consumer Financial Protection Bureau (CFPB) has begun an inquiry into these BNPL companies to determine how they can regulate this new financial service. 

Until then, it is up to the consumer to do their best and ensure that their decisions are in their best financial interests. By budgeting effectively and knowing the constant state of your financial position, you can make better-informed decisions regarding whether you should utilize BNPL services for an item with a high price.

Main Image Credit: Juicy FOTO / Shutterstock.com

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