You may have noticed an upward trend when checking during an online purchase pay in installments as an option.
Offers often claim to be “free” to consumers, which may be true if all payments are made on time.
These installment plans known as “BNPL” – Buy Now, Pay Later – may seem like a better deal than taking on higher interest credit card debt. They are operated mainly by five third-party financial companies, Affirm, Afterpay, Klarna, PayPal and Zip.
On closer inspection, you might think that BNPL isn’t a bad deal. You get what you want, when you want it, and you can get up to six months to pay for it.
Complaints to the Consumer Financial Protection Bureau (CFPB) suggest otherwise.
According to a study by the US Public Interest Research Group (PIRG) over the past three years, consumers filed 1.2 million complaints. Additionally, there have been an increasing number of complaints filed with the Better Business Bureau.
There is also the issue of consumer protection. Unlike credit cards, the BNPL does not. If you get a defective product paid for with your credit card, you can often return it and dispute the charge. This may not be the case with installment plans.
In a nutshell, BNPL are short-term instant loans. In a recent report about them from Forbes Adviser, here are the good and the bad:
Advantages of the BNPL
Ability to split your payments. It could make an expensive item more accessible since you don’t have to shell out a lump sum.
There is no hard credit. Unlike applying for a new credit card, BNPLs are easier to obtain. This means that someone new to credit or who doesn’t have a strong credit profile might find it more appealing to make a purchase this way.
Simple to do. Online shoppers in particular may find the immediate gratification of buying what they want in easy-to-understand terms a preferable way to shop.
Can help manage cash flow. A BNPL can help someone buy what they need on a payment plan that fits their budget.
Disadvantages of BNPL
There are a few potential pitfalls to be aware of with this type of financing offer.
Terms may vary. Before committing to a BNPL loan, it is important to know the terms of the agreement. For example, a 0% interest rate may not last the full term of the loan, leaving you with costly finance charges and very high penalties could be imposed on you if you skip or miss a payment.
Some come with a flat fee. These types of programs add a fixed fee to your monthly payments, which may cost you more over the life of the loan compared to purchasing the item outright.
They do not help build credit. If you pay on time, it won’t help your credit. However, late payments can be reported and have a negative impact.
May encourage overspending. The ability to refund an item over time can make a purchase more affordable.
If you’re inclined to use an installment plan, here are some suggestions we offer at the BBB:
Think of it as a loan. Even though many installment payment services only have a few small payments and zero percent interest, it is essential to remember that it is always borrowing money to enjoy a product before it is paid. In totality. Ask yourself if paying the full price means spending more than you can really afford and make your decision accordingly.
Stick to a budget. Consider how semi-monthly or monthly payments might affect your budget – even if the payments seem small. Will they cut funds set aside for necessary expenses, like rent or groceries?
Read the fine print. Before signing up to pay in installments, understand exactly how the service works. Read the fine print of the agreement to find out which company is financing, how long the financing terms are to pay off the purchase and in how many installments, how they handle late payments and how much interest is charged, if any. applicable.
Get to know the finance company. Research the finance company on BBB.org to make sure it is a reputable company with honest business practices.
Know how your credit could be affected. Keep in mind that unpaid debts may be sent to collection agencies and after a 90 day overdue period may be reported to credit bureaus. This could have a negative impact on your credit score.
Dennis Horton is director of the Better Business Bureau’s Rockford Regional Office, which serves Winnebago, Boone, and Stephenson counties, among others.