CHICAGO – At first glance, a “buy now – pay later” finance plan may seem like a good idea to consumers. How good is it?
Fox 32’s Dawn Hasbrouck takes a look the pluses and minuses in this moneysaver special report.
The Growing Popularity of BNPL
What we know:
Nearly 87 million U.S. consumers used a “buy now – pay later” financing plan last year. That’s up about 7% from 2023, according to a recent report from Capital One Shopping.
“Buy now – pay later” plans allow consumers to break down the cost of a purchase into four smaller, interest-free payments that are often made over a few weeks or months. It works like an installment loan.
We asked some Fox 32 Chicago viewers online if they’ve used one and to buy what.
The Pros: Easy Acces and No Interest
“They’re not all bad, but there are cons,” said Donna Rasmussen, Executive Director of Consumer Credit Counseling of Northern Illinois.
“The pros are that it’s easy for someone who doesn’t have credit, has a credit issue. They can, there’s no big application process. They can click and purchase their product or food or whatever it is that they’re buying. They can do it right away.”
“Another pro is that it breaks it up into a certain number of payments, four monthly payments, more often than not, it’s four monthly payments.”
The Cons: Small Payments, Big Risks
But making those four monthly payments isn’t always as easy as it sounds.
“The problem is ‘buy now, pay later’ is available for almost any type of purchase,” said Kevin Brasler, Executive Editor of Consumer’s Checkbook. “I mean, fast food restaurants, you can often pay in four for your meal. People are using ‘buy now pay later’ for just basic necessities like gas and groceries.”
“With a lot of people, they take out several, sometimes dozens of these buy now pay later offers. They’re paying through automatic debits from their checking accounts,” Brasler said.
That’s called “debt stacking,” and it can add up to trouble, fast.
“They lose track of how many they have or what payments are left, and then they get overdrawn. And so, they’re not only hit with late penalties from the buy now, pay later financing companies, but their bank charges them for overdraws also,” Brasler added.
According to BankRate.com, a late fee for “buy now – pay later” financing can be as high as 36%.
Fees, Penalties, and a Lack of Protection
Once you start racking up late fees between your bank and your “pay later” plan, Rasmussen says you can find yourself in a situation similar to one involving a payday loan.
“You get into this cycle where you’re constantly paying late fees and never getting caught up, and there’s no one to report it to because there’s no protections for consumers with these type of apps and financial services,” Rasmussen said.
And that’s not all.
“A big problem with these loans, and they are loans, is that they were designed to escape regulation and oversight. Federal lending laws, they only apply to loans where the number of payments are five or more,” Brasler said.
You could also find yourself in a tough spot if you need to return your purchase.
“With ‘buy now, pay later,’ there’s dispute resolution programs in place. For most of these companies, there weren’t always, but there are now. But there’s no guarantee, there is no legal guarantee that they have to do anything for you, unlike the credit card companies, which by law have to freeze that amount in your account, have to investigate, have to rule on the dispute, and usually rule in consumer’s favor,” Brasler said.
Why Younger Consumers are Drawn In
Yet, the number of consumers using these financing plans continues to rise.
“I think a lot of Millennials and Gen Z people use them because they’re tech savvy, it’s easy, it helps them budget a little easier. I think they don’t have to, they’re not certainly reconciling their bank statements anymore. They’re just looking at their bank app,” Rasmussen said.
Initially designed to help consumers buy big ticket items but now can be used to buy just about anything, our experts offer this advice on how to use “buy now – pay later” plans.
Expert Advice and Warnings
What they’re saying:
“It seems to a lot people this is a more responsible way to pay than using a credit card and maybe adding debt to your credit cards. It becomes a bigger and bigger problem because they’re using these programs as you would a credit card. They are adding debt, they are loans, and they run into trouble later on because there are late fees. There are problems and penalties if you’re not paying on time,” according to Brasler.
“So I think the right way to do it would be to understand the consequences of it if it doesn’t go right. I think that’s the only right way to do it,” Rasmussen said.
Response from the Industry
The other side:
We reached out to the financial technology association who represents “buy now – pay later” lenders about these plans.
Miranda Margowsky, Head of Communications with Financial Technology Association, sent Fox 32 Chicago the following statement.
“Consumers value ‘buy now pay later’ because it allows them to pay for a purchase over time without incurring interest or revolving a balance. Our data shows that consumers are using these products responsibly and repaying in full and on time, with a 98% repayment rate. BNPL providers clearly notify users with reminders before payments are due, and repayment plans are always accessible in the app or the user’s account. There are no hidden fees. Once consumers use BNPL, they are more likely to use it again, reflecting positive experiences with the product.”
More Resources:
If you need financial help, here are a few places that can offer some assistance:
The Source: For this story, the Fox 32 Chicago Special Projects Unit interviewed two leading consumer advocate organizations on the pros and cons of how “Buy Now Pay Later” plans work. The Unit conducted a digital survey to get viewer input on if they do or do not use the loans.