Expert Take: Buy now, help me later, or hurt my finances?
Stash Wealth CEO Priya Malani and Paula Pant, the host who Podhyny Anything Podcast Talk is currently buying, will pay later.
Buy now and users will pay more and more later.
Klarna, one of many companies that allow users to buy something now and pay installments over time, said last month that consumer credit losses in the first three months of the year rose 17% from a year ago as users struggled to pay. It confirmed previous studies showing similar rises. According to a survey by Lendingtree, 41% of users have been paid at least once late in the past year, starting from 34% a year ago. Bankrate surveys showed that 18% missed payments.
With the economy slowing down and savings from the massive pandemic gone by, financial advisors are warning users who tend to be younger.
“If you’re using BNPL, you may not be saving to cover the cost of purchasing,” said Rick Miller of Miller Investment Management.. “Savings for retirement probably aren’t even thinking about your mind. You need to pay yourself first and don’t spend anything you can’t afford.”
Why do people use BNPL?
Americans often use BNPL to buy good services or services they can’t afford now. They make the first payment, and over time they install the remaining expenses and pay in installments. Essentially, they are getting loans for their balances.
A quarter of BNPL users say they used loans to buy groceries, according to Lendingtree’s survey of 2,000 US consumers between April 2 and age 79. This is up from 14% a year ago amid rising prices in supermarkets.
A third of users view BNPL as the “bridge” for their next paycheck, Lendingtree said. That’s up from 30% last year to 27% the previous year.
Clothes, including shoes and accessories, are the most commonly purchased items using BNPL, followed by technology devices and home decor, Lendingtree said.
According to the Consumer Financial Protection Bureau (CFPB), the average purchase amount was $142 in 2022, the latest data for 2022. However, we have noticed that around 63% of users have multiple BNPL loans.
How can BNPL put your future at risk?
- Overexpenditure: “Relying on BNPL and short debt gives consumers a false sense of affordability and makes it easier to overexpand financially,” says Haiyan Huang, Chief Credit Officer at Prosper.
- Limit future borrowings: “If BNPL supports your purchase, if you can’t afford to pay it back, your credit score could be a hit,” said Miller, especially if you missed your payment. “This can hinder your ability to borrow in the future, which is important as you get older and seek a mortgage (or) car loan.”
BNPL payment history is not normally reported to major credit reporting companies, but failures in repayments could be reported by debt collectors, the CFPB said. BNPL companies can also limit future use.
Credit scores “help to determine what could affect loan and mortgage interest rates, premiums, rental approvals, credit card credit limits, and employment.
- Tweet your spending and budgeting mentality: “You may feel like you can buy what you want, but that’s probably not,” Miller said. “As with retirement, future spending can’t be done irregularly, as you become bonds.” Also, “Budgeting is something you need for your future self, especially when retirement happens.”
What can BNPL users do?
The first thing everyone, not just BNPL users, needs to ask is whether a purchase is essential when considering taking on debt, Huang said.
If yes, consider your repayment schedule and how it affects the repayment of other debts.
It’s also important to explore all the options before borrowing money, Huang said. Please check if financial aid is available. If you own a home or have a personal loan to cover your expenses at a lower interest rate, consider tapping on your fairness, she said.
“Fixed-rate personal loans can be a powerful tool for BNPL to consolidate high-profit debts and cover large one-off costs without the need for financial juggling,” says Huang. “They offer predictable monthly payments, clear repayment terms and often lower interest rates than credit cards.”
Note, most personal loans are reported to the credit department, but that’s not necessarily bad. “When used responsibly,[they]can help you build or strengthen your credit history,” she said.
Medora Lee is a money, market and personal finance reporter for USA Today. mjlee@usatoday.com and Subscribe to our free daily money newsletter Personal finance tips and business news every Monday to Friday.