Buy Now Pay Later Catches On Fast, New Payment Concept Could Also Be Risky

Fueled in a big way by Gen Z’ers and millennials, Buy Now Pay Later (BNPL) is growing rapidly as an alternative way to buy goods.

The emerging concept that allows people to make online purchases and pay them off later is surging at a brisk pace. In fact, consulting firm Oliver Wyman stated BNPL providers racked up  $20 billion to $25 billion alone in transactions across America last year.

Observers say BNPL is gaining momentum largely because scores of consumers are using the approach instead of traditional payments like credit cards. They add COVID-19 is helping fuel BNPL activity as shoppers look for new ways to buy while trying to curtail spending.

Predictions for BNPL growth are eye-popping as people are expected to dish out $680 billion worldwide point-of-sale installment payments over e-commerce portals by 2025, the fintech research firm Kaleido Intelligence reports. Observers declare firms like PayPal, Afterpay, Klarna, and Affirm, among others, are making the digital payment options available to people.

But buyers, including Black American consumers, may do well to consider the ups and downs of BNPL before taking that plunge. In 2021, 56% of Americans have used a BNPL service, a 48% gain from last year. Consumers aged 18 to 24 (Gen Z) represent the largest group (61%) using the service in 2021, reflecting a 62% rise from last year. Those are among findings from a survey of 2,000 Americans by The Ascent in July 2020 along with updated survey results from March 2021. A Motley Fool firm, The Ascent reviews products like credit cards, savings accounts, and mortgages to help people make wise financial decisions.

Among other key survey discoveries: Some 53% of respondents who have never used BNPL say they’re at least somewhat likely to use it within the next year. Among BNPL users who have used the service more since the pandemic started, 41% report they have done it to conserve cash in case of an emergency, while 25% report it’s because of lost income. Thirty-one percent of BNPL users have made a late payment or had late fees, up 41% since last year. Gen Z is the most likely to make a late payment, with 47% being late and/or incurring a late fee.

A robust 62% of BNPL users believe the payment method could replace their credit cards, even though only about 25% really want that to happen.

The requirements for BNPL usage are pretty basic. You reportedly must be at least 18 years old and have a valid debit or credit card to link to the account. Some businesses do credit checks to help determine how much you can finance. You then use BNPL at stores that use the service once you agree to it.

BNPL services are a bit like credit cards, Matt Frankel, a certified financial planner at The Ascent, told  Black Enterprise via email. He says BNPL can be an excellent personal finance tool, but can also be your worst enemy. And just like credit cards, he noted BNPL services are best used by individuals with the financial discipline to handle them correctly.

The upside of BNPL services is that consumers can spread purchases out over several months, or even years, without paying interest. For example, you might use a BNPL service to buy something that costs $2,000 and can pay it back over the next year. He pointed out paying by BNPL rather than a traditional credit card would save you hundreds of dollars in interest.

On the other hand, Frankel says BNPL services can make it tempting to buy things you don’t really need, and they tend to have lower credit standards than traditional credit cards. “This can make it easier for borrowers to get in trouble.” He pointed out that younger generations—particularly those aged 18 to 24—may be tempted to use BNPL services over credit cards, but there are some risks.

Despite the common perception, many BNPL services do have fees for late payments. Those fees can vary considerably and can result in interest charges too. Some services start charging interest on unpaid balances as soon as the account becomes late, and the rate can be very high, Frankel says.

Another big risk with some—but not all—BNPL payments is something called “deferred interest,” especially if you’re already facing financial hardship. Deferred interest means that if you don’t pay the balance in full by the end of the BNPL period, you’ll get charged all the interest you would have accrued from the start.

Frankel added another difference is most credit cards report your payment activity to the credit bureaus, which builds your credit history. Some BNPL services don’t, however, they report late and missed payments.

As one alternative, Frankel says there are some excellent 0% intro APR credit card offers on the market right now. Many have zero-interest periods of a year or more and no annual fee. And unlike BNPL services, some offer the ability to earn cash back rewards on your purchases.

“These can be a great choice if you want your responsible payment history reported to the credit bureaus and want the flexibility to pay over a longer period of time.”