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The Pros and Cons of Using Buy Now, Pay Later Programs

Mastercard is the latest corporation to jump into the “buy now, pay later” trend. The card company is launching a program called Mastercard Installments that will allow banks to delay payments from customers. The option for consumers to buy now, pay later has been growing fast over the last few years.

Buy now, pay later has grown to a $100 billion business. During the pandemic, many shoppers turned to that delayed payment model. Consumers spent about $97 million on the installment plans in 2020. Approximately 45 million Americans will use the installment plans just in 2021, according to Investors.com. Many of the customers will be minority millennials and Gen Zers who distrust or can’t afford credit cards.

But are these installment plans a good idea for consumers?

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How Does Buy Now, Pay Later Work?

Just as for generations layaway allowed shoppers to purchase clothes in stores monthly installments, now “buy now, pay later” lets customers make purchases online and pay over several months. Some programs charge a small interest fee, others are free. One big difference from layaway: you get the product right away. With layaway, you could only take home your items once you paid in full.

When you make a purchase online, you can choose to have buy now, pay later as an option. Once the merchant approves, you put down a small down payment. Then, you gradually pay off your purchase over a certain amount of time on your credit card or from your bank account.

The Buy Now, Pay Later Players

Mastercard’s “buy now, pay later” plan is Mastercard Installments. The program will launch in early 2022 in the U.S., the U.K., and Australia. Mastercard won’t directly loan to consumers. The company will collaborate with financial institutions like SoFi and Synchrony to offer loans to consumers. Mastercard Installments will let customers pay back loans in monthly interest-free payments.

In addition to Mastercard, Visa is another big credit card launching a buy now, pay later program. Visa Installments is similar to other apps with payment options online that let you pay in six installments. However, it differs from other plans because it uses your existing Visa credit card limit. Unlike other apps, Visa doesn’t have an approval process since you must already have a Visa card before using Visa Installments.

Another service called Split It uses your existing Visa or Mastercard to make payments. The app doesn’t charge late fees.

Affirm is a big player in the space and became even bigger with a recent partnership with Amazon. When you shop at your favorite store, you pick Affirm as a payment method at checkout. Then, you’re approved for the loan and pick a repayment schedule. The repayments are usually on a 3, 6, or 12-month plan. Affirm doesn’t charge fees, but interest rates can rise as high as 30 percent, depending upon purchase. Affirm’s credit limit is $17,500.

Klarna offers a pay-in-four plan that lets you pay interest-free if you pay in 30 days. If you take longer to pay off a purchase, interest can be as high as 30 percent, though the standard is 19.99 percent. The company also has fees if you want to change your payment due date, and Klarna’s late fees can range from $7 to $35.

Afterpay is an Australian buy now, pay later company available for use in the U.S. It offers a six-week payment plan. Afterpay’s credit limit is $500 but it can increase if you develop a history of making payments on time. The app charges an initial $10 late fee and $7 for each week you haven’t paid.

PayPal also has a buy now, pay later plan as well. If you already have a PayPal account, PayPal’s pay-in-four plan lets you make four interest-free payments.

Sezzle is an app that requires a 25 percent down payment and subsequent payments every two weeks. The app differs from other plans by letting you reschedule your payment schedule for free the first time, and each additional reschedule has a $5 fee.

Perpay is a buy now, pay later app only available on its marketplace and has $35 late fees.

Apple and Goldman Sachs teamed up in July up to launch Apple Pay Later. Apple Pay Later offers four interest-free loans or a longer payment plan with interest.

Advantages of Buy Now, Pay Later

The payment installment plan can have benefits for many consumers. Black customers that are often locked out of traditional credit can quickly qualify for the installment plan. In addition to that benefit, most of the programs have lower interest rates than credit cards.

Buy now, pay later can also teach you to be disciplined enough to pay off the balance of the charges.

The payment installment apps offer various perks as well. Affirm, for example, has a high purchase limit is $17,500. Meanwhile, PayPal offers a zero percent APR line of credit to customers.

Disadvantages of Buy Now, Pay Later

While the installment system can be beneficial to consumers, there are some downsides. The buy now, pay later apps often have promotional interest-free loans. However, if you pay late, the interest can jump to 30 percent. Late payments can occur if you aren’t keeping track of your spending habits.

If you’re not keeping track of your spending habits, you may incur extra debt by being on multiple buy now, pay later plans. If you have many installment plans and are charging more than you can afford, that can lead to compounded late fees on your short-term loans that can end up costing you more in the long run.

If you use credit cards to pay off the buy now, pay later debts, you can be “debt stacking” and add more debt to your credit cards. If you incur more late payments and debt, it could hurt your credit score in the long run. Apps like Affirm report delinquent payments to the credit bureau Experian, which can lower your score.

Even when you make payments on time, it may not build your credit. Some installment apps don’t report your payments to credit bureaus, so make sure you ask about credit reporting if you’re interested in building credit.

Financial Expert Says Buy Now, Pay Later Has a Downside

Financial expert Kimberly Rotter also thinks that buy now, pay later plans are great for emergencies, but not for impulse purchases.

“I don’t like buy now, pay later in general,” Rotter said. “If you can afford to buy something over the next three, four, or six weeks, why not just wait? BNPL plays on the idea that you should get what you want when you want it, a lifestyle that is unsustainable for most people.”

Rotter also thinks the plans hurt your credit score in the long run.

“Buy now, pay later doesn’t do a lot of good for your credit, even if you pay on time. For one thing, many buy now, pay later loans are not even reported to the credit bureaus unless you default, anyway, in which case you get the ding,” said Rotter.

“Affordable payments and zero interest / low-interest offers are great when you NEED to make a big purchase that would otherwise be hard to afford. If your refrigerator dies, a  buy now, pay later payment plan could save the day. But otherwise, buy now, pay later shouldn’t have a place in your regular financial plan. The downsides outweigh the benefits,” she added.

The buy now, pay later option of payment may be attractive to Black customers who want an easy, affordable way to make purchases. However, make sure you read the fine print on the apps and make sure you make your payments on time so you can enjoy your purchases.

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