The Rise of BNPL and Initial Precautions
Using buy now, pay later (BNPL) has become increasingly common in recent years as people seek to split and finance their purchases. According to Credit Sesame financial analyst Richard Barrington, key steps for utilizing BNPL include budgeting beforehand, reviewing the plan's terms, determining associated fees, and preparing for automatic payments.
If you need BNPL to be able to pay for something, you have to question how you’re going to come up with the money to make the BNPL payments when they come due.
Budgeting to Assess Affordability
Barrington recommends reviewing expected income over the BNPL payment term and subtracting essential expenses to confirm sufficient funds remain for installments. Failing to do so risks missed payments, late fees, or inability to cover necessities due to overcommitment. Budgeting ahead helps determine if the purchase and potential debt buildup are feasible.
Reviewing Terms and Understanding Fees
Users must closely examine BNPL plan terms, including exact payment amounts, due dates, and consequences of late payments. BNPL arrangements often occur at the point of sale amid distractions, so Barrington advises taking agreements home to read thoroughly before committing. Late fees averaged $7 for a loan on a $135 purchase, per the Federal Reserve Bank of Richmond, and can form a large percentage of low-priced item costs.
Know how much you have to pay and when. Also pay attention to what happens if you don’t make a payment on time.
Managing Automatic Payments and Avoiding Pitfalls
To steer clear of late fees, set calendar reminders or opt for automatic payments, but monitor amounts and schedules to prevent overdrafts from insufficient funds. Some BNPL services mandate automatic enrollment. Barrington cautions against multiple simultaneous BNPL loans, especially when finances are tight, and advises avoiding items whose useful life is shorter than the repayment period.
Alternatives to BNPL
Instead of BNPL, consider secured credit cards or becoming an authorized user on another's card for those lacking strong credit. Average FICO scores stood at 715 last year per Experian, with requirements varying by card.
