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6 Top Tips for Managing Buy Now, Pay Later

Our resident financial advisor, Anna Yen, gives the lowdown on BNPL

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Buy now, pay later (BNPL) loans let you split the cost of purchases into smaller installments. While these arrangements make larger or necessary purchases more affordable in the moment, they also carry some risks.  

What is “Buy Now, Pay Later”?

Buy now, pay later companies provide short-term loans that you repay in equal-sized chunks, known as installments. One common repayment schedule is the “Pay in 4,” which lets you repay your debt in four installments set two weeks apart. 

Companies like Paypal, Klarna, Affirm, and even Apple may offer low or 0% interest if you repay your balance quickly. (Usually within 2 weeks to 6 months.) Some also offer longer-term loans ranging up to 5 years at varying APRs – some as high as 36%.

The majority of online retailers partner with these third-party financiers to extend BNPL options at checkout. Even some credit cards run BNPL programs by breaking larger purchases into set payments at a fixed fee, rather than charging interest.  

Does buy now, pay later affect credit score?

BNPL loans can affect your credit score, and rarely in a good way. 

Most BNPL companies issue a soft credit check – which doesn’t affect your credit score – to examine your eligibility. (Technically, that means that buy now, pay later” are no credit check loans.) However, that’s often a formality; many approve customers even with poor or no credit. Longer-term loans and larger purchases may warrant a hard credit check, which can ding your credit score temporarily.  

But that’s not where the danger lies. While most BNPL companies don’t report your positive payment history to the credit bureaus, they may report missing or late payments. In other words, these short-term loans are much more likely to hurt your credit than help it.  

How do buy now, pay later companies make money?

Buy now, pay later companies can make money by charging:

  • Interest on larger or longer-term loans, with APRs ranging as high as 36%
  • Late and missed payment fees
  • Merchant fees – typically 2-8% of each transaction – to retailers 

Pros and cons of BNPL

In theory, BNPL arrangements benefit retailers and shoppers alike. Shoppers can break big purchases into affordable payments, while retailers can increase their sales numbers. And since many BNPL plans offer interest-free periods and soft credit checks, the risk is low – on the surface. 

But BNPL is also a great way to hop on the debt train if you can’t afford your purchases. Since BNPL plans are just short-term loans in disguise, missing payments risks racking up fees, high interest rates, and hits against your credit. And after all that, there are fewer consumer protections to guard against fraudulent or slimy practices. 

6 top tips for managing Buy Now, Pay Later arrangements

To stay debt free, you might not want to rely on buy now, pay later arrangements. But, as with all debts, it’s possible to use these short-term loans to your advantage. 

Here’s how. 

Use BNPL loans to spread large expenses over time

Sure, it’s unwise to take on debt you don’t need. But when you are in need, BNPL plans can split large, unaffordable transactions into smaller, more affordable payments. 

For instance, say you need a new, $1,000 work laptop. If you’re working paycheck-to-paycheck, $1,000 might be a completely impossible expense. But if you can split that $1,000 into four monthly payments of $250, buying a laptop might just become feasible. 

Similarly, you might use BNPL loans for smaller purchases when you’re between paychecks, but will have the money in 1-2 weeks. 

Avoid unnecessary purchases

Taking on debt effectively commits your future paychecks to past wants and needs. The more money you spend now, the less you’ll get to keep later – and the higher the risk you’ll default and harm your credit. 

But sometimes, life happens and you need a new work laptop or part for your car before payday. In those situations, BNPL plans can provide a lower-interest alternative to credit cards and personal loans. 

Limit the number of BNPL payments you owe

Unlike credit cards, you can’t bundle BNPL purchases together and make a minimum payment. Instead, you have to pay on each purchase separately and on time. 

The more BNPL purchases you make, the easier it is to get lost in a sea of due dates and over-commit your funds. It’s better to avoid accumulating too many debts and sticking with 1-2 at a time, even if you can technically afford the cost. 

Stick with reputable platforms

Buy now, pay later companies are sparsely regulated compared to credit cards and personal loans. 

Fewer consumer protections means that if anything goes wrong – such as needing to return an item or falling victim to fraud – you may struggle to recover your money. Or if you miss a payment, the company may not work with you to avoid high interest and fees.  

That’s why it’s important to stick with reputable BNPL services. Consider Apple’s Buy Now, Pay Later service, “Apple Pay Later,” or big names like Klarna and Affirm. PayPal also offers a line of credit-style BNPL service on purchases of $99 or more. 

Read the fine print

No matter which lender you choose, you should always read the fine print on potential contracts. BNPL lenders usually provide documents that outline your payment amount, interest rate, repayment schedule, and applicable fees. Make sure you understand these terms before taking on new debts. 

Make sure you can manage your payments 

Similarly, you should make sure you can make your monthly payments on any potential BNPL loan. If you don’t do the math upfront, you may run into late or missing payments, which can incur fees or trigger higher interest rates. 

Even worse, missing just one payment may cause the company to report your delinquency to the major credit bureaus. (Even if they weren’t previously reporting your positive payment history!)

Use BNPL loans you can afford 

Buy now, pay later programs are an evolution of credit cards designed to expand credit access but also make you spend more. Many BNPL companies approve applicants who don’t qualify for a credit card at all.

Despite the temptation, it might be wise to avoid buy now, pay later programs – particularly if you don’t know how you’ll make repayments. Between their convenience and low upfront interest rates, it’s easy to overspend. 

On the flip side, BNPL loans give people with poor or no credit a chance to split payments up for larger purchases. Still, it’s important to make sure you’re not just accumulating extra debt and kicking your responsibilities down the road.   

BNPL can be a useful tool as long as you have a budget that incorporates repayments. Need a hand budgeting? Check out Cleo’s free budgeting features. 

Enjoy this post? Give it a share or send it along to a friend. You never know, it could make a big difference. Big love. Cleo 💙

In a tight spot? Cleo could cover you for up to $250.* No credit checks. No interest. No stress.

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