personal finance

The Potential Downsides of Buy Now, Pay Later Programs Like Affirm and Afterpay

Twenty/20

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Since she discovered buy now, pay later, or BNPL, programs two months ago, Erica Park has used them to finance $700 worth of purchases, including clothing, an air purifier, vacuum and juicer. The installment plans have made her self-described shopping addiction easier to justify.

"I am able to afford all my impulse buys, which is awesome. I definitely should be saving instead," the 27-year-old Arizona resident says. "I use it because it doesn't make me feel as guilty, since it is a small amount due upfront and you instantly get the product."

Park is far from alone in her enthusiasm for these programs. Check your favorite shopping websites, and chances are you'll see the option to finance products using Affirm, Afterpay, Klarna or one of the other BNPL companies; they have exploded in popularity over the past year, according to industry research. 

But shoppers should be careful. While BNPL programs are convenient, they could lead to overspending.

Typically, these programs enable customers to buy products online and in some stores, and spread the payments over a small number of fixed installments. But terms for all of them, including interest, fees and credit reporting, differ, which can complicate things for customers who have to keep track of everything on their own, says Charlotte Principato, financial services analyst at Morning Consult.

The loans are advertised as alternatives to credit cards, which is why they are so popular among Gen Z and millennial shoppers who are less trusting of credit card companies than older generations (or do not qualify for one yet), Morning Consult data shows. In fact, Gen Z usage of BNPL programs increased 87% between April 2020 and July 2021, per Morning Consult

If shoppers make payments on time, then the programs can help them stay out of high-interest debt, Principato says. And representatives from the companies tell CNBC Make It they are more consumer-friendly than credit cards by design. Klarna, for example, sends email and in-app reminders when payments are coming due, among other measures to prevent over-spending, and Afterpay says 95% of payments never incur a late fee. 

But according to Park, while BNPL installment payments may seem small, it can be easy to rack up more than you can afford to pay off each month. While she can afford to pay off her bills, she has no money left over at the end of the month for any type of financial cushion, which can be stressful. And if you do miss a payment, you will pay a fee.

"I would be careful if you are the type of person to overindulge too much, because it adds up," Park says.

Check the terms

BNPL programs are also popular because the companies don't make a hard credit inquiry before approving you. But that also means you need to have sound judgment about whether or not you can actually afford the installments you're signing up for.

"Just because you qualify for BNPL, or any other credit product, doesn't mean you should use it," says the Consumer Financial Protection Bureau (CFPB).

It's also important to understand what you're signing up for. The CFPB warns that consumers might not always understand the terms that they are given, or the different terms between different programs.

Most BNPL companies do not charge interest if you pay on time. But if you miss a payment, you are likely on the hook for a late fee, and what you owe could be sent to a debt collector, depending on the company, the CFPB says (Afterpay says it does not do this).

And often, these payments are taken directly out of your checking account (though others can be put on a credit card). If you don't have enough funds available on the day your payment is due, you could overdraft your account. 

Some programs do have protections in place: Afterpay, which was recently acquired by Square, and Klarna, for example, won't allow consumers to make additional BNPL purchases until all payments are up to date.

BNPL programs also don't offer the same consumer protections as credit cards, including chargeback rights. If you receive something that is defective or not as advertised, you can get reimbursed if you pay with a credit card. But that's not the case with all BNPL financing options, so you might have trouble if your purchase is faulty or a scam. 

But if consumers can track their purchases and afford the monthly payments, BNPL can be a good alternative to credit. That's how Park views it: When she couldn't qualify for a credit card, she turned to BNPL.

"I feel like Afterpay is a great way to feel like you are worth [loaning] money to," she says. But, "it can also be dangerous because the costs of merchandise add up really fast."

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