Watch Out for These Buy Now, Pay Later Traps

Among its pitfalls, buy now, pay later can tempt you to take on too much debt, and it may not help your credit.
Last updated on Nov 9, 2021

Many or all of the products featured here are from our partners who compensate us. This may influence which products we write about and where and how the product appears on a page. However, this does not influence our evaluations. Our opinions are our own. Here is a list of our partners and here's how we make money.

If you haven’t yet been tempted at checkout to spread out payments on a purchase, you will be soon. The buy now, pay later industry is growing quickly, but it could be enticing shoppers into purchases they can’t afford.

More than one-third of Americans (37%) have used a buy now, pay later service within the past 12 months, according to a new NerdWallet survey. These installment loans, offered at the point of purchase, make it easy to spread the cost across several payments and are generally available to people without a credit check.

But many recent borrowers admit to using BNPL to overextend themselves.

BNPL providers are expanding their customer base significantly — Affirm’s active users grew 248% from 2019 to 2021, and Afterpay’s grew 483% during the same period, according to their annual reports. If you’re among those signing on at checkout, steer clear of these potential traps:

1. Taking on unnecessary debt

One-third of recent BNPL users (33%) say they used that financing option because it allowed them to purchase multiple items they wouldn’t otherwise have been able to get, and nearly 3 in 10 (28%) because it allowed them to “splurge” on an expensive item they wouldn’t normally buy, according to the survey.

Do this instead: Use BNPL only for necessary items. This is debt, and it’s rarely a good idea to take on unnecessary debt for things you wouldn’t normally be able to pay for with cash. While BNPL is convenient, ease of use is not justification enough. Your college textbook could be a good use of BNPL; a new wardrobe, not so much.

2. Missing the fine print

One of the appeals of BNPL is the easy terms, but the terms vary widely across providers. Some, but not all, are interest-free, and some, but not all, have no late fees.

Afterpay, one of the largest global BNPL providers, for example, charges up to $8 if your payment isn’t received within 10 days of the due date. While this charge isn’t unreasonable, it is profitable — the company collected $87 million in late fees in the year ending June 2021, according to its annual report.

Do this instead: If you decide BNPL is the right financial move, know what you’re signing up for. Look for one with no interest charges, reasonable or no late fees and a number of installments that you can confidently fit into your budget. Also, ask about returns — certain plans won’t allow a refund if you change your mind.

3. Thinking it will help build your credit

One allure of BNPL services is that they may allow people with no or bad credit to buy things on credit. More than 1 in 4 recent BNPL users (26%) say they chose that payment option to help build their credit history, according to the NerdWallet survey.

They may be disappointed to find out that BNPL providers will send delinquent accounts to credit bureaus, but may not send on-time payments. In other words, they may be more inclined to hurt rather than help your credit history. Affirm, for example, doesn’t report on-time payments on loans that are 0% interest and paid for across four biweekly payments.

Do this instead: If building your credit is a top concern, there are better ways to do it. A secured credit card is one option. These cards work by tapping money you’ve deposited ahead of time and require you to make on-time, regular payments on purchases just like a traditional card. So you’re consistently drawing down and paying back that initial deposit.

4. Not buying yourself enough time

Most BNPL services require payoff in four installments; if your purchase is worth several hundred dollars, those payments can be quite large.

Do this instead: If the purchase you’re tempted to use BNPL on is large enough (and essential), a personal loan may be a better option. A credit card may be a good BNPL alternative if you can pay off your purchase within a monthlong billing cycle, but personal loans are good for larger purchases that need more time. A traditional personal loan can extend your payments for several years, if needed.

Get more smart money moves – straight to your inbox
Sign up and we’ll send you Nerdy articles about the money topics that matter most to you along with other ways to help you get more from your money.