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Shoppers filling their carts this holiday season will likely have the option to “buy now, pay later” at checkout.
Known as BNPL for short, these payment plans break up your purchase into smaller, equal installments, often for zero interest and no fees if you pay on time.
If you’re looking to stretch your gifting dollars further, BNPL can seem like the obvious choice. But it’s still debt, and it comes with risks.
Here are five common issues you may encounter with BNPL and how to avoid them.
1. Long repayment terms
BNPL plans typically follow a pay-in-four model: your total purchase, divided by four, with each payment due two weeks apart.
For example, if your total is $200, you’ll pay $50 at checkout. The remaining three payments — each $50 — are billed to your debit card, credit card or bank account every two weeks until the loan is repaid.
It may seem straightforward enough, but six weeks is a long time to pay off a holiday purchase, says Erik Nero, a certified financial planner based in Gansevoort, New York.
“BNPL taps into this basic human instinct of wanting it now, but it’s just another way to separate people from their money,” he says. “It’d be much better to budget for or save toward that gift than have it be spread out for weeks.”
Depending on the lender, payments could even extend over months. Affirm, which partners with retailers like Amazon and Walmart, commonly offers three-, six- and 12-month terms, in addition to its pay-in-four. Two other lenders, PayPal and Afterpay, recently announced their own monthly payment plans, with terms from six months to two years. These plans tend to charge interest.
Avoid it: You may see multiple BNPL options at checkout. As long as you can afford the installments, choose the shortest plan, which is typically a pay-in-four. Better yet, consider a more affordable gift that doesn’t require you to break up payments.
» MORE: Compare buy now, pay later apps
2. Ease of overspending
One of the most commonly cited concerns about BNPL is that it encourages overspending in even responsible shoppers, because the small installments make people feel like they’re spending less than they are.
This problem tends to get worse if you have multiple BNPL loans, which isn’t uncommon. A recent NerdWallet survey on BNPL found that 30% of Americans have used BNPL in the last 12 months. These BNPL users tapped the source of financing six times, on average.
Nero says though the amounts seem manageable at face value, they add up and often derail his clients from their larger goals.
“I call it being twenty dollar-ed to death,” Nero says. “You're spending $20 here and $20 there, and then all of a sudden you spent $100 that month. But where’s your savings?”
Avoid it: Stick to one BNPL loan this holiday season, and reserve it for a special gift that may be slightly above your holiday budget. Just make sure you can afford the installments without sacrificing other financial goals.
3. Unexpected fees
A September study from the Consumer Financial Protection Bureau showed that user fees for BNPL are on the rise.
According to the study, most of these are late fees, which tend to be around $7 per missed payment and are sometimes capped at a percentage of the purchase or payment amount.
But there can be other fees depending on the lender. Zip, which lets you buy now, pay later at any retailer that accepts a Visa card, charges a $1 convenience fee per installment. That means any purchase you make with Zip will be an extra $4.
Some lenders also charge fees for rescheduling a due date or reactivating your account after it’s been disabled from missing a payment.
You may encounter fees on the other side of the transaction, too. For example, if you tie your BNPL loan to a debit card, lose track of the payments and overdraw your account, your bank may charge an overdraft fee. These fees can be $30 to $35, and in extreme cases, lead to the bank closing your account.
“Just like any other credit product, you have to ensure you can afford the payments,” says Laura Udis, senior program manager of small dollar, marketplace and installment lending at the CFPB. “Even if the lender approves your application, you should check that there are sufficient funds in your bank account.”
Avoid it: Before opting in to a BNPL plan, read the loan agreement carefully to understand the fee structure. Consider whether you can make the payments on time for the duration of the loan, and keep in mind that most BNPL lenders withdraw the installments automatically from your debit card, credit card or bank account.
4. Tricky returns
Anyone who’s shopped for a distant relative knows how important it is to be able to make a return. But returns are tricky with BNPL because you’re actually dealing with two parties: the store you bought the merchandise from and the lender you used to pay for it.
With BNPL returns, you’ll deal with the store first. If the store accepts the return, it will refund the lender that paid for the merchandise. You then have to wait for the lender to issue a refund to your account. There’s usually a lag, which means you may be stuck making payments on an item you’ve already returned.
Consumers have reported that stores sometimes have trouble accepting returns for items purchased with BNPL. And if you need to file a dispute, dealing with the lender’s customer service department can be challenging, since not all lenders provide an easily accessible phone number.
Avoid it: Don’t use BNPL for gifts you’re unsure about. If you’re buying clothing for someone else and second-guessing the size or color, buy directly from the store, which will make returns easier.
5. Negative credit reporting
Most BNPL lenders don’t report your payment history to the credit bureaus, which means you can’t use a BNPL plan to build your score, unlike a credit card or personal loan.
In some cases though, BNPL can actively hurt your credit score, particularly if you default on the loan.
“If the consumer ultimately doesn’t pay, the remedy is typically to freeze the account so that the consumer can’t use it again,” Udis says. “Then there can be late fees and even debt collection, depending on the BNPL firm.”
For example, Klarna, which partners with retailers like Macy’s and Bed, Bath & Beyond, transfers unpaid debts to a debt collection agency after a series of past-due reminders.
Having a debt in collection can lead to more fees, as well as show up on your credit report — sometimes for years — damaging your score and making it harder to get approved for credit in the future.
Avoid it: If you’re worried about repaying a BNPL loan, get in touch with the lender as soon as possible and discuss your hardship options, which may include rescheduling a due date, waiving a fee or extending the loan’s term.