Buy now, pay later plans come with risks

Buying big-ticket gifts through installment plans because you don’t have the cash on hand has been around for eons. But for a growing number of young consumers, especially those under 24 with short credit histories, buying now and paying later to get what they want immediately is becoming the shopping option of choice for seemingly everything from flat-screen TVs to an order of meatball subs.

For parents, there’s reason to worry. A survey last month by the financial technology firm Afterpay found that 42% of children in Generation Z — which includes those 24 and younger — are more likely to purchase items online or at a store if a buy now, pay later plan is offered. Other surveys that focus solely on college students support that shopping trend.

This is not surprising given a growing preference among younger consumers for online shopping in the wake of the pandemic, and their comfort level with alternative payment programs. In addition, many using buy now, pay later financing don’t have credit cards or are saddled with low credit scores that make expensive purchases even pricier.

BNPL plans, as they’re called, are similar to traditional retail installment plans and other deferred payment options, such as layaway programs. Except with buy now, pay later, shoppers not only get the product upfront, they pay for it in equal installments and often interest free. Traditional deferred payment options don’t always let you walk out with the new flat-screen, a Peloton or furniture until you’ve paid in full.

Companies such as AfterPay, Klarna, PayPal and Zip provide buy now, pay later options. American Express does too, and Mastercard recently launched a buy now, pay later system. Amazon and Apple have partnered with Affirm, while Target has teamed with Sezzle.

Call me old school, but I’m not a fan of BNPL. To me, buy now, pay later provides an easy opportunity to buy above and beyond your means. It feeds into the whole notion of instant gratification. After all, why pay now when you can pay later, and enjoy your purchase immediately?

While spreading out the cost of a $1,000 TV might make financial sense with no finance charges, this financing option is becoming increasingly popular for smaller purchases. Target, for example, is testing installment purchases for food and other product categories.

One Target advertisement that landed in my email offered shoppers a checkout choice using Sezzle of four equal installments over six weeks on orders over $35. “Instant approval, no impact on your credit score,” according to the ad. “No interest ever, plus no fees if you pay on time.”

What to watch in the fine print

▪ Know your limits. For some lenders, there are no limits on how many buy now, pay later loans you can have open at the same time. That’s a recipe for overspending.

▪ Miss a payment and there could be late fees, deferred interest and other penalties. A LendingTree survey found that seven in 10 buy now, pay later users have been nicked by interest or fees for late payments.

▪ Some companies require repayment every two weeks, rather than once a month.

Credit-check policies vary. According to LendingTree, some lenders require only a soft credit check, which doesn’t affect your credit score, while others perform no check at all. So, if you’re looking at buy now, pay later plans to build credit, do your homework.

Questions, comments, column ideas? Reach Steve Rosen at sbrosen1030@gmail.com.