Why 'buy now, pay later' isn't the best way to go for your holiday shopping

How’s your holiday shopping going? It can be hard enough to find everything this year thanks to chip shortages and supply chain issues, not to mention the expense.

If that wasn’t enough, there are plenty of scams to watch out for. Tap or click here for some of the biggest holiday-related scams making the rounds right now.

Something else you might have noticed this year: all the “buy now, pay later” options showing up on your favorite retailers’ websites. Why worry about something right now that you can put off until later, right? On the contrary, keep reading to find out why these services might not be the best idea.

How BNPL works

“Buy now, pay later” services, or BNPL, seek to ease (or at least delay) some of the financial burdens that come along with shopping. Split the cost of something into equal payments, then pay it off on a schedule without the hassle of credit checks and traditional loan agreements.

They continue to grow in popularity. A few of these BNPL companies are reporting a 500% increase in sales from last year to this year. Even Amazon recently added an option for customers to pay through installments through Affirm. Tap or click here for the details.

Depending on the company and plan, payment is often completed over the course of four installments and can be done weekly, bi-weekly or monthly. There’s usually a minimum purchase price to qualify for BNPL. These plans can make it easier to buy things you normally wouldn’t be able to in one go, which can be both an advantage and a risk.

People who use BNPL plans tend to spend more than they can afford, according to business analytics platform CB Insights. The temptation is strong but it all catches up later.

Other drawbacks include unexpected fees. For example, you may not pay interest upfront, but will do so later on in the payment cycle. A fixed fee will leave you paying more than you would if you purchase the merchandise outright, and keep in mind that fees and interest can go as high as 30%. Late payments can start low but add up to a chunk of the total purchase price.

Here are some of the popular services and how they work:

Affirm partners with big brands to offer BNPL plans at checkout or online, as is the case with Amazon. Interest can be as low as 0% on short term loans or higher on longer ones. There are no late fees, no prepayment fees, no annual fees and no fees to open or close your account.
Afterpay offers short-term payment plans through its free app. You make your first payment upon purchase and the rest over six weeks. There are no fees when you pay on time, but late fees can go as high as 25% of the purchase price.
Klarna lets you make purchases in four interest-free payments via the app, website or wherever Visa is accepted. A late fee of up to $7 may be charged.
Sezzle lets you make four payments over six weeks. There are no fees or interest for payments made on time, but you’ll be charged $10 for late payments.
Zip (formerly QuadPay) lets you pay in four installments over six weeks. There are no interest or fees for on-time payments, however late fees vary depending on what state you live in and can be as high as $7.

If you use Microsoft Edge, you might have noticed Microsoft added Zip as a way to pay for online purchases. User complaints range from browser slowdowns to the ethical implications of pushing shoppings to buy things they might not be able to afford.

Think it through

Most BNPL programs tout interest-free payments, so they’re literally banking on you being late in payments so they can hit you with penalties. Don’t use a BNPL service if you’re buying a luxury item or something you don’t really need. The debt can rack up quickly and you’ll have a hard time getting out from under it.

Have a minute to spare? Listen to Kim’s take on “buy now, pay later” services by tapping or clicking here.