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Is ‘Buy Now Pay Later’ a Good Deal for Holiday Spending, or a Gimmick?

Pam Krueger  |  November 15, 2021

The truth about Klarna, Afterpay, Affirm and other “buy now, pay later” companies that seem almost too good to be true this holiday season. 

As you start down your holiday shopping list, be prepared for higher prices thanks to supply chain disruptions and other issues causing prices of most holiday goods to spike more than usual. It’s true: discounts will be harder to find this holiday season. But that’s not stopping shoppers from spending. Consulting firm Deloitte is forecasting a 7% to 9% increase in holiday sales compared to the same period in 2020, which can be good news for retailers, but tough on your budget.

Many of us are now looking for creative ways to stretch our money. The temptation to grab gifts for everyone we know and love is oh-so-real, but it can easily wind up putting us into expensive credit card debt, and holiday debt is something that can negatively impact our finances long after the gifts are opened and the festivities + visits are over.

As you’re shopping this year and looking for ways to be as generous as possible without getting in over your head, there’s a good chance you’ll see some of your favorite retailers offering a “Buy Now, Pay Later” (BNPL) program. You may know them better by their official names: Klarna, Affirm, and Afterpay, to name a few. At first glance, they may sound great: You can spend more without using your credit cards. But what’s really going on? 

The Truth About What You’re Offered At Checkout 

In many ways, BNPL programs sound similar to the old concept of layaway – those store-based programs from the past where you paid a little at a time towards an item you wanted, until you could finally pick it up and take it home. But today’s BNPL programs are like layaway in reverse. They enable you to get your item immediately, then pay for it in installments over time. Many online retailers – including Walmart, Amazon, QVC and others – have partnered with these companies, and once you arrive at checkout, you’ll often see language encouraging you to pay for your item “four easy, equal payments,” with supposedly no fees or interest if you make your payments on time. But here’s the thing: Whenever you use one of these services, the company is running a credit check on your before you’re approved. It’s a soft credit inquiry (thus no impact to your credit), unless you miss a payment, in which case you’ll pay a fee. Plus, any missed payments can also cause damage to your credit score. Just how much damage? A recent Reuters/Credit Karma survey showed that nearly 40% of consumers in the US who had given them a go had missed at least one payment and nearly three-quarters of those saw their credit score take a hit as a result. 

Does Buy Now, Pay Later = Spend More? 

So, why do businesses offer this service, especially since they’re paying the fees? (Yes, the merchant you’re shopping from pays the BNPL companies directly for their service.) 

They’re hoping that these programs will entice you to increase your spending. Since you’re only paying one-quarter of the cost of the items now, you may think that you can afford to buy more! But you need to have the money ready when it’s time to make those additional payments. If you don’t make the four equal payments by the deadlines, you could end up with large late fees or double-digit interest rates on the remaining balance. It can be easy to lose track of the deadlines if you use these programs for several purchases. Be aware that BNPL programs may actually encourage more spending on credit cards in order to make the installment payments – which turns into the very same long-term high cost debt that you were originally trying to avoid. In the moment when you’re deciding whether you can truly afford to make a purchase, BNPL can be a great shopping option if you’re confident that you can make the installment payments on time. It can also be especially appealing to young adults who may not have access to credit yet. Just be careful that you’ve read the fine print.

As the holidays approach, you’ll see BNPL ad campaigns  in full swing. Using one of these programs is certainly a better arrangement than paying 16-24% in annual interest on unpaid credit card balances. But make sure you’re using BNPL as a tool when it’s needed, and not letting these programs use you.  One way to make sure you’re keeping your budget + spending in line is to put an up-front limit on your holiday expenses, and stick with it no matter how you’re paying the bills. You got this.


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