The use of “buy now, pay later” (BNPL) schemes has surged in popularity over recent years, as consumers seek to finance their purchases in manageable installments.
Richard Barrington, a financial analyst at Credit Sesame, emphasizes the importance of preparation when engaging with BNPL options. He outlines several crucial steps consumers should take, including budgeting in advance, closely reviewing the payment terms, understanding potential fees, and being ready for automatic deductions.
“If you find yourself relying on BNPL to make a purchase, you must consider how you will manage your payments when they become due,” Barrington cautioned. He advocates for proactive budgeting to determine whether one can afford both the purchase and any resulting debt.
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Barrington suggests that potential users assess their projected income over the duration of the BNPL agreement, while subtracting essential expenses to ascertain if they can comfortably cover installment payments.
“Failing to do so could lead to missed payments and late fees,” he warned.
Furthermore, careful budgeting can prevent consumers from stretching their finances too thin by committing excessive funds to BNPL obligations, according to Barrington.
He also urges individuals to scrutinize the terms of any BNPL agreement they consider.
“Make sure you understand how much you owe and the payment schedule,” he advised. “It’s equally important to know the implications of late payments.”
Being aware of payment sizes and timing can significantly help consumers avoid incurring additional costs. The Federal Reserve Bank of Richmond reports that the average late fee for BNPL loans is around $7 for a $135 purchase.
Barrington recommends that consumers refrain from signing a BNPL agreement at the point of sale. “It’s often rushed and can be distracting,” he explained. “Instead, take the time to read the agreement at home, and return to the store if you decide to proceed. If the effort doesn’t seem worthwhile, it may be best to forgo the purchase.”
Barrington stresses that BNPL agreements often come with strict payment conditions, which can result in late fees if not closely monitored.
He warned that while late fees may seem minor, they can amount to a significant portion of the overall cost for lower-priced purchases.
To avoid late fees, consumers should stick to a budget and have a firm understanding of the terms of their installment plan. Additionally, setting calendar reminders and taking advantage of automatic payment options can prove beneficial.
When utilizing automatic payments, Barrington highlighted the need to monitor both the payment amounts and schedules. “Failure to do so may result in overdraft fees if your account lacks sufficient funds,” he cautioned.
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Some BNPL services require automatic payments, but Barrington advises avoiding taking on more than one BNPL arrangement at a time. “Many individuals turn to BNPL during times of financial strain,” he said. “Managing multiple agreements can exacerbate those challenges.”
Barrington recommends avoiding BNPL for items whose utility does not extend beyond the repayment period of the loan.
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As an alternative to BNPL, he suggests exploring secured credit cards or becoming an authorized user on someone else’s account, particularly for those with less-than-ideal credit histories.
“Secured credit cards or having someone back you on their credit card can be viable solutions for individuals who struggle to qualify for credit independently,” he noted.
The requirements for credit cards can vary significantly. In the past year, the average FICO Score among Americans was reported at 715, according to Experian.
