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If you grew up in the 90s or earlier, you’re probably accustomed to a handful of payment options when you stand at the checkout counter – or in today’s world, stare at a payment screen. Some options are slowly fading. Cash is a pain to carry around and useless for online shopping, and checks are time-consuming to write out. Credit or debit cards have become the option of choice for most of us. They’re fast and painless (provided you have the money you’re about to spend).

But you may have noticed a lot of new choices popping up recently. Digital wallets (Apple Pay, Google Pay), peer-to-peer apps (PayPal, Venmo) and cryptocurrency (bitcoin, ethereum) are all recent options in the increasingly digital financial world.

Another option that’s quickly becoming ubiquitous is “buy now, pay later,” or BNPL; from 2019 to 2021, usage increased nearly 10 times over. Klarna, Afterpay and Affirm are a few of the most popular BNPL services. Each gives you the option of breaking up a purchase into a handful of interest-free regular payments. (They also offer longer repayment periods that may include interest.)

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How bad is ‘buy now, pay later’?

We’ll be honest – a lot of the data around BNPL suggests it’s being used mainly by people who aren’t as financially stable: those with lower credit scores, fewer assets and lots of other consumer debt.

Economically, that might not be good news as it could help to artificially prop up consumer spending and keep inflation hanging on. But it doesn’t mean BNPL can’t be a savvy way to pay for things.

To be clear, BNPL offers are debt. You’re taking out a short-term loan for your purchase. Like all debt, you need to be thoughtful about using it. Here are the pros and cons.

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Benefits of BNPL

Flexibility with your cash

If you make all your payments on time, you can avoid paying interest and fees. That means you can use BNPL to break up a large purchase, giving you breathing room if you don’t have all the money right now or allowing you to keep earning interest on your cash for longer.

No impact to credit

Unlike credit cards, many BNPL companies don’t report the loans to credit bureaus (assuming you make the payments as scheduled), and they don’t run a “hard” credit check that will appear on your credit history. Both can help keep your credit score intact.

Quick access

Finally, unlike personal loans, approval for BNPL is quick and allows you to make your purchase immediately.

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Drawbacks of BNPL

Missed or late payments

To many people, “debt” is just another four-letter word; if that’s you, you already know the potential downside of BNPL loans. They can allow you to live beyond your means. And if you miss a payment, you’ll likely owe late fees. Should you really fall behind in payments, BNPL providers can also turn the debt over to a collection agency, which will do a number on your credit score.

Difficult tracking

Unlike with a credit card, multiple uses of a BNPL provider won’t usually be rolled into one balance with a single due date. Each loan is independent with its own payment schedule. That can make it easy to forget how much you owe, lose track of what’s due when or accidentally overdraw your bank account when autopayments hit.

Missing out on rewards or credit-building

Another potential downside could be the loss of credit card rewards, although some BNPL providers have started offering proprietary rewards programs. Hopefully it goes without saying – but we’ll say it anyway – that you should only be concerned about rewards if you’re paying off your purchases with no interest.

And because BNPL loans aren’t reported to credit agencies, they can’t help you improve your credit history.

Difficult returns or refunds

Finally, returns can be tricky if you use a BNPL option because the merchant will refund the money from whence it came – and that’s to the BNPL provider, not you. At best, you may have to deal with a short delay in getting your money back. Some consumers reported that they were required to keep making payments until the loan was paid off before they received a refund.

Note that the Consumer Financial Protection Bureau recently announced that BNPL providers will be required to start offering the same dispute and refund protections as credit card companies, which should help.

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The bottom line: When to use BNPL

In short, you can consider using a BNPL offer when:

• You already have the cash to pay for a purchase but want to keep earning interest on it a little longer, or as a “bridge” until a bond or CD matures
• You’re certain you won’t have an issue making each payment by the due date
• You need to finance a large purchase but don’t want it to affect your credit score (for example, if you’re in the process of applying for a mortgage or other big loan)

But don’t use a BNPL offer if:

• You tend to forget or lose track of when payments are due, or you’re juggling multiple BNPL loans
• You need the return and dispute protections of a credit card (as explained above, this might not be an issue in the future)
• You’d prefer to earn credit card rewards (and then use your cash to pay it off)
• You’re trying to build or improve your credit history by making on-time payments
• You’re using it to finance a purchase you couldn’t otherwise afford

Making a large purchase?

Talk to your financial planner about your options for financing large purchases and the advantages of paying cash vs. interest-free financing.

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