Buy Now, Pay Later (BNPL) services like Klarna and Afterpay have skyrocketed in popularity in recent years. These services seemingly offer convenience and flexibility by allowing consumers to split purchases into manageable monthly payments, often without interest for a period of time. However, while BNPL may seem like a helpful financial tool, it can lead to a vicious cycle of debt and financial instability if not used responsibly. Here’s why you should think twice before using BNPL.

Encourages Overspending

The main problem with buy now, pay later services is that they make it extremely easy to spend money that you don’t have. By breaking purchases into smaller payments, it’s easy to fall into a trap where you think you can afford expensive items just because you think you can afford the monthly payments. 

This can quickly lead to living beyond your means and thinking you can afford things that you really should not be buying. Like credit cards, BNPL services can hide the psychological pain that may be associated with paying for things on a debit card or cash. It’s easy to forget about where the money will actually come from and leave it as a problem for future you. 

Possibility to Accumulate Multiple Payments

It’s also remarkably easy to have many BNPL plans going at once, and to keep signing up for them. With credit cards, you’ll see one unified balance per credit card which makes things much easier to track. While of course you can have many credit cards that may be split over different platforms, typically lenders won’t continue offering you cards if you’re already in a lot of debt (unless they are particularly predatory). The amount of balances and due dates to track is much smaller and if you use a tool like Empower or Rocket Money, you can quickly and easily see the balances and due dates on all your cards.

BNPL balances may be spread between multiple different platforms like Klarna, Affirm, and After Pay, and it’s much more difficult to manage one payment per purchase with a different due date and balance on each purchase. Before you know it, you can have many payment plans going at once and a significant amount of your monthly income can be tied up.

High Fees for Missed Payments

Although BNPL services tout “interest-free” payments, they often charge hefty late fees of upwards of 25% of the whole purchase price if you miss a payment. Credit cards can also charge 25%-30% interest, but this is over an entire year, whereas BNPL payment plans typically can be over a much shorter time period. These late fees can quickly add up especially if you have a lot of payments at once. If you are miss a payment on any one of them it can quickly spiral out 

The Lie of “Interest-Free”

Similarly, although many BNPL services don’t actually charge interest for a certain period of time, if you don’t pay off the entire balance by the end of that period, you may have to pay interest for the entire time period. This can be a huge sum of money that you might not be expecting.

Like Credit Cards, But Worse

BNPL services share many negatives with credit cards, when it comes to promoting bad spending habits and accumulating debt. However, if you are disciplined and don’t spend more than you can afford, BNPL services are simply worse than credit cards in almost all aspects. Credit cards also give you a grace period of ~2 months before your purchases start accruing interest, as long as you don’t carry a balance month to month. This is similar to the length of many shorter term BNPL payment plans.

In addition, credit cards offer many benefits over BNPLs:

• Credit cards offer robust consumer protections. You can dispute charges for things like fraud, scams, unsatisfactory goods or services, etc. Thus you can get your money back if something were to go wrong. BNPLs do not offer anything of that sort and you are most likely screwed if something happens
• Credit cards accrue points. If you’re responsible with your spending, you can get points or cashback worth 1-5% on your credit card purchases. Whereas for BNPL purchases you won’t get anything. Though keep in mind if you end up paying interest on your credit card, no amount of points will matter.
• Credit cards can also offer perks and benefits like airport lounge access and dining credits on credit cards with higher annual fees. But even on credit cards with no annual fee, you can often get purchase protection or extended warranty, which can be worth a lot of money especially for expensive electronics.

What to Do Instead

If you’re tempted to use BNPL services for expensive purchases that you may not be able to afford, consider these alternatives:

1. Save Up for Purchases: Make sure you actually have enough money to buy something, before you buy it. 
2. Use a Budget: Consider allocating future funds to certain large purchases that you want to make. Planning will help you keep yourself accountable and prevent yourself from falling into a cycle of debt.
3. Use a Credit Card Wisely: Credit cards can be very useful if used wisely. They can help you with cash flow and earning rewards on your purchases. However, make sure you budget wisely and can fully pay off your credit card balance every single month. 

Final Thoughts

BNPL services may appear convenient and useful, but they often come with hidden costs and risks that can harm your financial health. By understanding the pitfalls and adopting smarter spending habits, you can avoid the debt traps that utilizing BNPLs can create. Credit cards are often a better choice and provide many benefits over BNPLs. However, remember that what’s most important is to spend money you actually have and to live within your means. If you can’t control your spending you should avoid both BNPL services and credit cards.

Disclaimer: The content provided on this blog (Zooming to Fire) is for informational and educational purposes only. It represents the opinions and perspectives of the authors and should not be considered as financial advice. The authors are not licensed financial advisors, and no content on this blog should be in any way interpreted as professional financial counsel or advice. See more here.