Should you buy now, pay later?

When the Federal Reserve Bank of New York released its report on household debt, the numbers were eye-popping. Total household debt in the first quarter of the year increased by 1.7% to $15.84 trillion, putting balances “$1.7 trillion higher than at the end of 2019, before the COVID-19 pandemic.”

The details showed that big jumps in mortgage and auto loans fueled the increase, as many rushed to lock in still-low interest rates before they began to rise.

Interestingly, credit card balances declined by $15 billion during Q1, but they are still $71 billion higher from a year ago. Economists posit that the reason for the drop is that many have plowed through their pandemic-era savings (the savings rate peaked at 33.8% in April 2020) and inflation is eating away at what remains. The government said that the personal savings rate was 6.2% in March, lower than the 8.3% in February 2020, before the pandemic hit.

Meanwhile, with inflation near 40-year highs and more Americans struggling to pay bills, another category of debt has nudged its way into the conversation: Buy Now Pay Later (“BNPL”).

You have likely encountered messages from your favorite online or even brickand-mortar retailer asking whether you want to finance your purchase with BNPL, an installment plan, where you can usually pay 25% of the purchase price now and then defer the rest of the cost into smaller, equal pieces in the future (usually a total of four payments), without requiring hard credit checks, which can hurt your credit score.

If all goes well and you make your payments on time, there is usually no interest charged, which is a compelling deal, especially in a rising interest rate environment.

That said, if you miss a payment, there could by late fees and interest, depending on the retailer and purchase amount, and some apps may have a small upfront charge each time you use a plan. That’s why the Consumer Financial Protection Bureau warns that “BNPL could look like a standard payment method,” which means that users “are really taking on a new form of debt.” In other words, like a credit card, BNPL is a convenient way to make a purchase, if you have a plan to repay the amount that has been charged.

The upside of using a credit card is that you may be entitled to cash back or rewards; there is ample protection against fraud; help with merchant disputes; and the mature credit card industry has mastered reporting on-time payments to the credit bureaus, which can help improve your credit score. The downside of credit cards is well-reported — if you can’t pay off the purchase in full, you will be whacked with sky-high interest charges.

Still, BNPL users seem to like the convenience, transparency, flexibility and predictability of the plans, which is why the industry is exploding. According to CB Insights, by 2025, the global BNPL industry is expected to grow 10 to 15 times its current volume to $1 trillion in gross merchandise volume, which is why many of the participants in the $8 trillion U.S. payment card industry are also developing their own versions of BNPL or partnering with companies already in the space.

The big BNPL players are Affirm, Afterpay, Klarna, PayPal and Zip (formerly Quadpay). Each has different rules about fees and interest rates, so you should carefully read the fine print to determine if you are ready to jump on the BNPL train. Like most borrowing decisions, much is predicated on where exactly you think you will be in your financial life when the train arrives at the station.