BNPL is an abbreviation for buy now, pay later. It’s a method some consumers use when purchasing various items they want or need.
With the recent pandemic, many people are struggling to make ends meet. This has led to an increase in the use of Buy Now Pay Later (BNPL) services, as they offer a way to defer payments on everyday expenses. However, using BNPL for emergency personal loans could lead to a debt headache down the road.
BNPL services typically involve interest-free periods, after which the borrower is responsible for paying back the full amount plus interest and fees. If emergency personal loans are not paid off within the interest-free period, the borrower could be stuck with a high-interest bill that they may not be able to afford. In addition, many BNPL providers charge late fees, which can further add to the debt burden.
For these reasons, it’s important to be mindful of how much you’re borrowing and to make sure you can repay the full amount within the interest-free period. Otherwise, using BNPL for emergency personal loans could end up costing you more in the long run.
In the following article, we’ll talk about the buy now, pay later option, when it makes sense to use and when it doesn’t.
How Does BNPL Work?
Buy now, pay later apps work by breaking purchases down into installment plans. Many brick-and-mortar stores and online retailers offer this option, which allows you to purchase a big-ticket item when you don’t have the cash to pay for it all at once.
Consumer advocates and economists don’t necessarily think that using the BNPL method will backfire every time. There are instances where you can utilize this strategy, and it won’t negatively affect your long-term finances. Knowing when it’s okay to buy something now and pay for it later depends on several key factors.
When to Buy Now and Pay Later
Let’s say you want a big-ticket item, like a new TV. You don’t have the money to pay for it all at the same time. You set up an installment plan with the entity from which you’re buying it.
That might work out fine if you have a steady job and know you can pay off your purchase in the allotted time without defaulting on the agreement. You also feel like the interest payments that come as part of the BNPL plan are not too prohibitive and that you understand how they’re structured.
That’s a situation where BNPL can work for you. It’s when you start using buy now, pay later for smaller, everyday expenses that you might get yourself into financial trouble.
BNPL for Everyday Purchases
With inflation on the rise, more consumers seem to be using the BNPL method for smaller, commonplace expenses like groceries. The Fed feels that many Americans are getting into trouble with BNPL loans, particularly when used for these smaller purchases. However, it can’t easily track debt levels stemming from them. It also can’t necessarily track loan delinquency rates, interest charges, fees, or transaction volume.
Some lending entities that give you money to cover commonplace expenses using the BNPL method aren’t subject to the same scrutiny and oversight as banks and credit unions. The Federal Reserve tracks things like car loans and credit card spending. It keeps an eye on that data and warns consumers about borrowing trends they should avoid. The Fed is not able to do that as well with BNPL lending sources. That data is not reported comprehensively to credit bureaus.
Should You Use BNPL for Everyday Expenses?
Virtually all economists and consumer advocates agree that if you’re going to use the buy now, pay later option, you should do so only for big-ticket items and then only sparingly. You should make sure you have a steady income stream to pay back that money expediently, and you should make sure you can handle the accompanying interest payments.
Using BNPL for smaller, everyday purchases leads to trouble more times than not. The lending entities that might allow you to borrow that money are subject to less oversight. As a consumer, you may find yourself in deep water with debt if you readily turn to these payment options for things like gas, grocery store runs, clothing shopping, etc.
For this reason, most experts feel that you should avoid using BNPL financing for everyday expenses.