Pros and cons of the ‘pay later’ promise
As tempting as it is to take home a purchase now, there are potential pitfalls to ‘buy now, pay later’ schemes.
Many seniors will remember using hire purchase and lay-by plans for major purchases.
With the former, you had use of the product while paying it off; with the latter, the store kept the item until you made the final payment.
These two forms of consumer credit have pretty much disappeared, supplanted by credit cards and, more recently, “buy now, pay later” (BNPL) services.
BNPL seems to be everywhere these days, offered by retailers (usually through a finance company) and even by banks and credit card companies.
The big attraction is that you pay no interest on your purchase – if you make the payments on time and in full.
If you don’t, then you may end up paying an astounding amount of interest.
While BNPL can seem appealing, especially for larger purchases, you should consider both the benefits and drawbacks to determine if it’s a good idea for you.
Benefit
Convenience: BNPL services provide an immediate solution if you need an item now but can’t pay for it in full.
Interest-free periods: Many BNPL plans don’t charge interest if you pay back within the set timeframe, making it cheaper than credit card interest.
Budget management: Spreading the cost over time can help manage your monthly budget, especially for unexpected expenses.
Drawbacks
Debt accumulation: It's easy to overspend because you don’t feel the immediate financial impact of your purchase, leading to potential debt accumulation.
Missed payments penalties: If you fail to meet payment deadlines, you may incur late fees or interest, and that can negatively impact your credit score.
Limited consumer protections: BNPL services might not offer the same level of protection as credit cards, such as dispute resolution.
Impact on credit score: Some BNPL services report to credit bureaus. Late or missed payments can harm your credit score, while others might not help you build credit even with timely payments.
When it might be a good idea
If you need an essential item (for example, a refrigerator) and can’t pay upfront.
You’re confident in your ability to make payments on time and avoid late fees.
When to avoid BNPL
It's not wise to accumulate debt to buy items you don’t need.
If you are unsure about future income and your ability to make payments.
If you generally struggle with budgeting.
In summary, BNPL can be a good idea when used responsibly for necessary purchases and when you're confident in your ability to make payments on time.
However, it's crucial to be mindful of the potential for overspending and accumulating debt, and to consider whether you're using BNPL for the right reasons.
Always read the terms and conditions carefully to understand any fees, interest rates, and how missed payments could affect your credit score.
