Buffalo, N.Y. (WBEN) - It has already been an active holiday shopping season, as many look to take advantage of online shopping in order to find that perfect gift for friends and loved ones.
While navigating some websites, one might notice a newer method of payment for items with Buy Now, Pay Later, with services rising to record levels over this past holiday shopping sales weekend.
For those who may be unaware of Buy Now, Pay Later services, it is described as a short-term financing method that allows one to make purchases and pay for them in interest-free installments. BNPL is also known as a point of sale installment loan.
"Companies like Affirm, Afterpay and Klarna, these companies often partner with retailers and they offer something like four interest-free payments over six weeks. That's a very common flavor," said Bankrate Senior Industry Analyst, Ted Rossman in an interview with WBEN. "Although sometimes these plans last longer with or without interest. It's kind of a new twist on an old concept. It's almost like reverse layaway, in some respects, that you get the item now and you pay for it over time."
While Rossman does believe the Buy Now, Pay Later method can be helpful for some, he warns consumers to be cautious if you choose that route of payment.
"Some people view Buy Now, Pay Later as kind of a kinder, gentler version of the credit card. Credit card interest rates are at record highs, over 20%. We don't want you paying that for month-after-month, especially if you make minimum payments. You could drag that on forever-and-ever," Rossman explained. "If you use a credit card and pay in-full and avoid interest and get rewards, now that's a different story. That's a lot more favorable.
"When it comes to Buy Now, Pay Later, I just worry it's a little bit of a slippery slope. This idea that, 'Well, I can't really pay for it now, but I'm gonna pay for it in the next six weeks.' What if something doesn't go according to plan? Or what if you overspend or you have a bunch of these plans running simultaneously? That's something that actually gets people into trouble, this whole $50 here, $50 there, all of a sudden, you've spent a lot more than you realized."
Rossman believes Buy Now, Pay Later is worth considering as a financial option in certain circumstances, but it's not always a great deal. While he feels many should think about specific terms, he adds these plans are typically easier to get than a credit card, which could work to one's advantage.
"I actually think the ideal situation is maybe if you can get a good deal on a big purchase," Rossman said. "For example, Affirm for years has had this partnership with Peloton. It's actually not quite as attractive as it used to be, because interest rates have gone up, but you used to be able to pay $50 a month for about four years and get a Peloton bike with no interest at all. Now they're gonna charge about 5%, even if you have really good credit. But that's still a lot lower than your typical credit card. ... Maybe apply this to a couch or a TV or a refrigerator. If you can get a good deal, that's the key. These terms vary widely. Sometimes it's interest free, sometimes it's 10%, 20%, or even 30%, so you definitely need to be mindful of both the term and the interest rate."
If anyone elects to use a shorter-term payment plan like Buy Now, Pay Later this holiday season, Rossman advises consumers to make absolutely sure items can be paid off.
"Six weeks doesn't give you that much time, especially considering that if you pay your credit card in-full, you could time your grace period such that you basically get that time anyway. Not if you have credit card debt, that's accruing every day. But if you are somebody who's going for these shorter-term plans, maybe even put the money in a savings account so you kind of free up some cash flow, but you also have that as a backstop so that you're not overspending or paying late, or taking on true long-term debt," Rossman said.
"I could see this as a potential use case for financing a couch, a TV, a refrigerator, a new set of tires or something like that. But you have to actually make the payments, and that's where sometimes people can just get trapped where you trick yourself. 'It's not $200, it's for easy payments of $50,', and all of a sudden maybe you're in over your head. So regardless of the approach, I think budgeting is important, and maybe even setting that money aside so that you're not surprised."