Understanding "Buy Now, Pay Later" Programs
You are in the process of making a purchase, and you see an option for "buy now, pay later." It sounds like a used car dealership and sounds sketchy. So, what is "buy now, pay later"? It is essentially a method to pay for medium-sized purchases, but in installments, offered by app-based financing companies. Credit check? No. Interest? No. For most installment options, all you need is the ability to make your payments on time. But there are some advantages and disadvantages you should be aware of...
Advantages and Disadvantages
As you might expect, there are benefits and drawbacks to using "buy now, pay later" programs.
Paying in installments or "buy now, pay later" has its benefits:
- When items are trendy and can sell out or have a special price, paying in installments allows you to get the item without paying all at once.
- If you want a higher-ticket item but do not want to devastate your bank account all at once, a payment plan may be for you.
A big purchase paid in installments? Sounds great, right? Well, there are quite a few things that you may want to consider before going the "buy now, pay later" route:
- If you miss a payment, you can face high interest (up to approximately 30%), which will be charged not on what you owe but on the initial purchase price. Additionally, if you miss a payment, you will also be facing late fees that can quickly add up!
- If you have automatic payments with apps like Splitit, you must make sure that the money is in your account. If your payment overdraws your bank account, you will incur additional fees from your bank.
- If you pre-pay your loan off, you may also be subject to a penalty. It sounds crazy to penalize someone for an early pay off, but if you pay yearly, you prevent the company from collecting interest. If you hope to pay it off sooner, check the fine print.
- One of the most severe disadvantages is that some of these apps still report to credit bureaus even though they did not require a credit check. That's a great thing if you pay everything on time; however, a missing payment could lower your credit score.
There are pros and cons to the "buy now, pay later" programs. The best way to use it is to purchase something you need but cannot purchase upfront. Try to avoid buying items simply because you can. By doing that, you can get caught up in the fine print of these programs, such as late fees, credit reporting, and added interest. If this isn't the program for you, take a look at personal loans, low APR credit cards, or going the old-fashioned route and saving your money.