5 Buy Now, Pay Later Headaches to Avoid This Holiday Season

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Shoppers filling their carts this holiday season will likely have the opportunity to “buy now, pay later” at the register.

Known as BNPL for short, these payment plans divide your purchase into smaller, equal installments, often without interest or fees if you pay on time.

If you are looking to optimize your donations, BNPL may seem like the obvious choice. But it’s still debt, and it carries risks.

Here are five common problems you may encounter with BNPL and how to avoid them.

1. Long repayment times

BNPL plans generally follow a four-pay model: your total purchase, divided by four, with each payment due two weeks apart.

For example, if your total is $200, you will pay $50 at checkout. The remaining three payments — each $50 — are billed to your debit card, credit card, or bank account every two weeks until the loan is paid off.

It might sound simple enough, but six weeks is a long time to pay off a vacation purchase, says Erik Nero, a certified financial planner based in Gansevoort, New York.

“BNPL taps into this basic human instinct to want it now, but it’s just another way of separating people from their money,” he says. “It would be much better to budget or save for this gift than to spread it out over weeks.”

Depending on the lender, the payments could even extend over several months. Affirm, which partners with retailers like Amazon and Walmart, offers three-, six-, and 12-month terms, in addition to its four-month payment. Two other lenders, PayPal and Afterpay, recently announced their own monthly payment plans, with terms ranging from six months to two years. These plans tend to charge interest.

Avoid it: You can see several BNPL options at checkout. As long as you can afford the installments, choose the shortest plan, which is usually a four-payment. Better yet, consider a more affordable gift that doesn’t require you to split payments.

2. Ease of overspending

One of the most frequently cited concerns about BNPL is that it encourages overspending, even among responsible shoppers, because small installments make people feel like they’re spending less than they are.

This problem tends to get worse if you have multiple BNPL loans, which is not uncommon. A recent BNPL NerdWallet Poll found that 30% of Americans have used BNPL in the past 12 months. These BNPL users used the funding source an average of six times.

Nero says that while the amounts seem manageable at first glance, they add up and often derail his clients from their larger goals.

“I call it being twenty bucks to death,” Nero says. “You spend $20 here and $20 there, then all of a sudden you spent $100 that month. But where are your savings?

Avoid it: Stick to a BNPL loan this holiday season and reserve it for a special gift that may be slightly more than your holiday budget. Just make sure you can afford the installments without sacrificing other financial goals.

3. Unforeseen costs

A September study by the Consumer Financial Protection Bureau showed that BNPL user fees are on the rise.

According to the study, most of them are late fees, which tend to be around $7 per missed payment and are sometimes capped at a percentage of the purchase or payment amount.

But there may be other charges depending on the lender. Zip, which lets you buy now, pay later at any retailer that accepts a Visa card, charges a convenience fee of $1 per installment. This means that any purchase you make with Zip will cost an additional $4.

Some lenders also charge a fee for postponing a due date or reactivating your account after it’s been deactivated for not missing a payment.

You may also encounter charges on the other side of the transaction. For example, if you link your BNPL loan to a debit card, lose track of payments and overspend, your bank may charge overdraft fees. These fees can be $30 to $35 and, in extreme cases, result in the bank closing your account.

“Like any other credit product, you need to make sure you can afford the payments,” says Laura Udis, senior program manager for CFPB’s small-dollar, market and installment loans program. “Even if the lender approves your application, you should verify that there are sufficient funds in your bank account.”

Avoid it: Before joining a BNPL plan, read the loan agreement carefully to understand the fee structure. Ask yourself if you can make payments on time throughout the life of the loan and keep in mind that most BNPL lenders automatically take payments from your debit card, credit card or bank account.

4. Delicate returns

Anyone who has shopped for a distant relative knows how important it is to be able to make a return. But returns are tricky with BNPL because you’re actually dealing with two parties: the store you bought the merchandise from and the lender you used to pay for it.

With BNPL returns, you will deal with the store first. If the store accepts the return, it will refund the lender who paid for the merchandise. You then have to wait for the lender to issue a refund to your account. There is usually a lag, which means you may be stuck making payments on an item you’ve already returned.

Consumers have reported that stores sometimes have difficulty accepting returns for items purchased with BNPL. And if you need to file a dispute, dealing with the lender’s customer service can be tricky because not all lenders provide an easily accessible phone number.

Avoid it: Do not use BNPL for gifts you are unsure of. If you’re buying clothes for someone else and are unsure of the size or color, buy direct from the store, which will make returns easier.

5. Negative Credit Reports

Most BNPL lenders don’t report your payment history to the credit bureaus, which means you can’t use a BNPL plan to build your score, unlike a credit card or personal loan.

In some cases however, BNPL can actively damage your credit score, particularly if you fail to repay the loan.

“If the consumer ultimately does not pay, the remedy is usually to freeze the account so that the consumer can no longer use it,” says Udis. “Then there may be late fees and even debt collection, according to BNPL.”

For example, Klarna, which partners with retailers like Macy’s and Bed, Bath & Beyond, is transferring unpaid debts to a debt collection agency after a series of overdue reminders.

Having debt in collection can lead to more charges and appear on your credit report – sometimes for years – damaging your score and making it harder to get approved for credit in the future.

Avoid it: If you are concerned about repaying a BNPL loan, contact the lender as soon as possible and discuss your options in the event of difficulty, which may include extending a due date, waiving fees or extending the term of the loan. ready.

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