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Three Considerations when Shopping with Buy Now Pay Later

April 21, 2022

When shopping online, you’ve likely seen the option to to Buy Now Pay Later (BNPL). Companies like like Klarna™, PayPal®, Afterpay™, or Affirm™ provide you with the option to checkout and only pay a portion of the total with the remaining equal payments due later on.

“Buy Now Pay Later may be a manageable payment option for some, but should be used sparingly and with caution to avoid a potential negative impact to a person’s credit history if payments become late or missed,” said Mary Trifero, SVP and Payment Operations Manager at Middlesex Savings Bank.

While it may seem attractive to finance a purchase this way, if you’re interested in using BNPL you should consider these three things:

1. It’s a credit that will come due.
BNPL is financing a debt that needs to be repaid just like credit cards and other revolving or installment loans.

2. Consumer protection is different than with credit cards.
Some stay clear of credit cards for the fear of getting into too much debt. Keep in mind that different types of credit come with different protections. Be sure to read the fine print for dispute resolution and policies on interest rates and late fees. Also unlike a credit card, if you return merchandise with a BNPL loan you may still need to make the payments until the return has been completed with the merchant.

3. BNPL could impact your credit score.
Major credit bureau Experian has already included data from BNPL companies and Equifax plans to join them. For BNPL borrowers who pay on time, this gives you a way to build credit history and possibly increase you credit score. The longer you hold a line of credit in good standing can positively impact your score. Be careful not to pay late or default on BNPL loans because this could negatively impact your credit score.

Here’s a hypothetical example of a consumer who found themselves in a BNPL bind:
Maddy found a designer handbag that she had been dreaming about. The only problem was that the $2,000 price tag was beyond her budget. Later that afternoon, she was on Facebook and saw an advertisement for the bag that stated she could buy now and pay later. Now, that luxury handbag didn’t seem so out of reach. Maddy committed to four $500 payments, and that original hefty price tag now presented itself as manageable.

Fast forward one week, and Maddy’s refrigerator stops working. Now that she is in a financial bind, Maddy begins to worry about how she’ll make the BNPL payments and also afford a new fridge. Later, when she was unable to make a BNPL payment, she received a late fee and soon saw a hit on her credit score.

This example is not to scare or worry you, but to simply demonstrate what can happen if you agree to purchase something that is out of your budget. While BNPL may an appropriate option for some, it’s important to consider your overall financial wellbeing before deciding to commit to the payments.
by Middlesex Savings Bank