What to Ask Before Using Buy Now, Pay Later

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Layaway has a new name, and it’s never been more popular.

Known as BNPL loans (buy now, pay later), this financing method has seen a spike in popularity thanks to new fintech platforms like Klarna, Sezzle, Affirm, and Afterpay. According to a new holiday spending survey by Morning Consult commissioned by Personal Capital, nearly one-third (29%) of respondents said they expect to use BNPL financing to afford this year’s holiday gift list.

Also called point-of-sale lending, BNPL loans tend to pop up at checkout — when shoppers are most prone to feeling the crunch. Some consider BNPL loans a little controversial, since they can encourage overspending and make credit available to people who are not otherwise qualified to borrow.

So what makes BNPL loans a good thing, in that case? Can shoppers utilize pay-over-time financing without straining their long-term financial wellbeing?

Ahead, we list 4 questions you should ask before signing up for BNPL financing so that you can protect your budget and credit score.

1. Do BNPL loans impact credit?

The impact of BNPL loans to your credit score is unclear; you’ll need to ask the retailer or lending platform directly. Be sure to ask whether there are:

Credit checks at the time of application;
Ongoing credit reporting (meaning your activity gets sent to the credit bureaus); and/or
Negative reporting only (meaning the bureaus only find out when you missed payments, but your good behavior isn’t on record)

Afterpay, for instance, doesn’t perform credit checks and only requires that you sign up for the app. Affirm performs soft credit checks when you apply to finance new purchases, and soft checks don’t show up on your report.

Also find out whether the loan platform reports to the credit bureaus regularly, or only when you miss a payment. Some BNPL companies use a practice called negative reporting, which works exactly like it sounds. Only missed payments show up, but you don’t get credit for on-time payment history. In these scenarios, there’s not much benefit to your credit score, only potential damage.

Affirm reports information to Experian inconsistently and only on some loans. These loans reportedly won’t show up on your credit report:

Loans with a 0% APR and four biweekly payments
Loans with a 0% APR and the option of a three-month payment term

Affirm reports your entire loan history (positive and negative behavior), but the company only sends information to Experian, and not the other bureaus (TransUnion and Equifax). If you hoped to use a BNPL loan to improve your credit score for an upcoming mortgage application, for example, you may be out of luck.

Last, remember that all BNPL loans could potentially impact your age of credit history if they are considered  revolving credit. Some BNPL financing services function as installment loans, meaning they close after you pay your purchase off. Others, however, act almost like a credit card with a fluctuating limit that you can access and pay off on a rotating basis any time you want to buy something big. The latter are more likely to be considered a revolving credit account on your credit report, which could impact your average age of credit.

2. What fees are there for BNPL loans?

Beyond the impact to your credit score, remember that BNPL loans are not always free. While many promote 0% APR financing for limited periods of time, BNPL loans often have late fees if you miss your monthly due date. Not to mention, the interest rate you receive is often based on your credit score. Just because a retailer advertises the possibility of getting 0% interest, always check what interest rate you personally qualify for before you accept the loan.

3. What’s my plan to pay it off?

Borrowing money for major purchases isn’t always a bad idea, but you should know how you plan to pay it off — especially if you’re working with a limited-time 0% APR window. Determine your overall holiday budget and divide it by the months you expect to be making payments on your BNPL loan.

Among survey respondents who said they plan to use BNPL loans for holiday shopping, income levels varied broadly. People at all different income levels rely on the convenience of BNPL loans, but that doesn’t mean everyone can afford to pay them back equally.

Roughly the same number of people making less than $50,000 per year plan to use BNPL financing as people who make over $100,000. Here’s how it broke down:

Income: Under 50k
Income: 50k-100k
Income: 100k+

Likely will use more BNPL loans this year:
12%
15%
14%

Likely will use a similar amount of BNPL loans to last year:
14%
17%
18%

4. Are there other options I’m not seeing?

Before you decide to sign up for a long-term financing option, take a moment to evaluate all your options, including not buying as many gifts.

Everyone’s making adjustments this holiday season, given global supply chain snafus and the ongoing Covid-19 pandemic. Anticipated spending is down, according to the holiday spending survey we referenced above. Of the surveyed Americans, 60% said they plan to cut back on spending.

Other alternatives to BNPL lending include using a 0% APR introductory period on a new credit card (this will require a credit check), budgeting ahead of time with cash, or cutting back on other lifestyle costs for the month of December to allow for more room in your budget.

The Bottom Line

Managing your spending is just one part of your overall financial plan. You can take a few actions now to get yourself on the right track.

Download Better Financial Life, an actionable guide with insights from fiduciary financial advisors. The guide is free.
Sign up for the Personal Capital Dashboard. Millions of people use these free and secure professional-grade online financial tools. You can use them to see all of your accounts in one place, analyze your spending, and plan for long-term financial goals.
Consider talking to a fiduciary financial advisor for more detailed guidance on your financial strategy.

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Author is not a client of Personal Capital Advisors Corporation and is compensated as a freelance writer.

The content contained in this blog post is intended for general informational purposes only and is not meant to constitute legal, tax, accounting or investment advice. Compensation not to exceed $500. You should consult a qualified legal or tax professional regarding your specific situation. Keep in mind that investing involves risk. The value of your investment will fluctuate over time and you may gain or lose money. Any reference to the advisory services refers to Personal Capital Advisors Corporation, a subsidiary of Personal Capital. Personal Capital Advisors Corporation is an investment adviser registered with the Securities and Exchange Commission (SEC). Registration does not imply a certain level of skill or training nor does it imply endorsement by the SEC.