It’s now easier than ever to buy costly items without going broke, thanks to Buy Now, Pay Later (BNPL) services – or so it seems. While these financial services may seem convenient, there’s a darker side to them that many aren’t aware of.
From overspending to high fees and interest rates, there are potential pitfalls that can quickly spiral out of control.
In this post, we’ll explore the risks and consequences of BNPL services so you can decide whether they’re right for you.
The Psychological Effects
BNPL plays directly into the impulse of instant gratification by offering you a way to get what you want without waiting. You can own the latest iPhone or wear the hottest new Jordans, even if you don’t have the money right now.
The only problem is that it can be addictive. Once you start using BNPL to satisfy your desire for immediate pleasure, stopping becomes difficult. You’d start relying on it, thinking it’s all you need to be happy or fulfilled, and when you can’t have what you want right away, you feel frustrated or disappointed. This creates a new fear: the fear of missing out.
You see your friends making purchases and worry that if you don’t follow in their footsteps, you’ll be left behind, missing out on the latest trends or most exciting experiences.
But the reality is, you aren’t missing out on anything important. Most of the purchases people make using BNPL aren’t necessities but luxuries. Relying on BNPL to satisfy your desire for instant gratification only creates more stress and anxiety in the long run.
The Hidden Costs
Did you know that, even without upfront costs, BNPL companies make more money by charging interest rates on your payments over time?
Some rates may seem low initially, but you might be shocked when you calculate the total amount you’ll pay over time.
Suppose you buy a ￡500 pair of sneakers using a BNPL plan with a 15% interest rate. If you make monthly payments of $50, it will take you 11 months to pay off the balance, and you’ll end up paying ￡550 in total – ￡50 more than the original price. That may not sound like much, but if you have multiple BNPL debts and carrying balances over time, those fees can add up quickly.
Similarly, every BNPL plan has a specific payment schedule; if you miss a payment or are late, you can be hit with hefty fees. These fees can range from ￡25 to ￡50 or more depending on the company and the fine print.
The Danger of Overspending
When you can pay for something over time, it’s easy to justify a purchase you might have ignored otherwise. You see something attractive, and before you know it, you’re signing up for a BNPL plan without fully considering the cost. This is also referred to as impulse buying.
Additionally, when you’re not paying for something upfront, it’s easy to lose track of how much you’re spending, especially if you lack a budget plan. You might make several BNPL purchases, but you’ll be surprised at how much you owe when the payments are due.
The Impact on Credit Scores
BNPL companies may run a credit check to determine your eligibility for their service. This check is usually a hard inquiry, which means it will show up on your credit report and can lower your score temporarily. If you have several hard inquiries within a short period, it can significantly impact your credit score.
But the impact of BNPL on your credit score doesn’t stop there. Whenever you make BNPL payments, the company may report them to the credit bureaus. If you pay on time and in full, it can positively impact your score. But if you miss payments or are late, it can negatively impact your credit score.
The High Cost of Convenience
It’s important to use BNPL services responsibly and carefully evaluate whether they are necessary before buying anything. If you decide to use BNPL services, be sure to read the fine print and understand all fees and terms associated with the service. By being informed and cautious, you can avoid falling into the dark side of BNPL and instead use it as a useful tool to manage your finances.
