Have you ever been in the middle of making a purchase that you knew you could only kind of afford? Like those maternity jeans that would be so comfortable for work. Or those last minute airline tickets to see your mom. Or that unbelievably on sale Hexclad pan bundle.
There’s always that moment when you inevitably see it: you can have those incredible pans for just 12 easy payments of $30, thanks to the availability of Buy Now Pay Later apps.
And you might find yourself considering the Buy Now, Pay Later payment option for this purchase. Because you don’t really want to overspend your budget for those jeans…do you? So wouldn’t it be better if you could just pay for them in installments instead? What’s the harm in a few interest-free payments?
The Real Cost of Buy Now Pay Later Apps
Well, the next time you are tempted to click that Pay Over Time! button at checkout, I want you to consider these 5 sneaky ways that BNPL financing options offered by Afterpay, Klarna, Paypal, Quadpay, Apple, Sezzle, Zip and others might actually be costing you more money. Even when the advertised interest rate says it’s technically free.
1. Extra Fees at Time of Purchase
Okay, so this one isn’t really all that sneaky: sometimes the extra fees are hiding in plain sight. I’m not that great at mental math, but even I can tell that something is off when $80 pants can be purchased in four installments of $23.99.
But sometimes you will only find out about the extra fees after you click the BNPL button at checkout. Some lenders charge additional fees for purchases made at non-partnered merchants and some levy extra service fees with each installment payment.
So make sure that you are always keeping a close eye on the fine print of those installment plan offers. Remember that none of these BNPL services are offering to break up your purchase into installments out of the kindness of their hearts. BNPL programs exist to make money off of your spending! And sometimes they are earning that money by straight up charging you more over time than you would have paid up front… even if they’ve found a way to not refer to that cost as “interest.”
2. Allows You To Spend Beyond Your Means
If an expensive item that seems totally out of reach at full price suddenly looks attainable with a BNPL plan, you should question that sensation of affordability. You aren’t saving any money when you buy something in installments — you are just spreading out the same purchase amount (or more!) over time.
Now, this is arguably true of any type of consumer financing. However, unlike mortgages or car loans, BNPL apps aren’t splitting the cost of a large asset over the course of multiple years or decades. On the contrary, most BNPL programs are giving you at most a few extra months, if not just weeks, to pay off large purchases. If you truly can’t afford the full purchase price today, is it realistic to think that you will suddenly have that money in your bank account within just a couple paychecks?
Another factor to consider is the reality that there are pretty strict limits to the amount of traditional consumer debt that a person can take on at any given time. If you’ve ever applied for a home loan, for example, you know that there is an extensive process you have to go through to prove that you have the ability to maintain the requested mortgage payment. Even car loans and credit cards require hard credit checks and evidence of appropriate debt to income ratios to qualify.
Buy Now Pay Later apps, on the other hand, do not go to nearly that level of effort when assessing your ability to pay back your loan amount. For a couple of small purchases with short term payment plans, this might not seem like a necessary hurdle. However, the business model of most BNPL companies is to incrementally increase the amount of BNPL debt you can carry at one time.
So, generally, the more often you use BNPL to make purchases, the more additional BNPL plans you can take on. And the spending limits on the amount of BNPL debt you can ultimately carry are pretty loose: some companies do not have any restrictions on the number of simultaneous monthly payments you can be responsible for at one time, and no companies take into consideration the payment plans you may already have open with other BNPL providers when offering you credit.
What this boils down to is that no one is watching your back with Buy Now Pay Later services except you. Just because you are being offered a BNPL loan does not mean you can afford it, and it is very easy to get tied up in concurrent BNPL repayment schedules for multiple loans that you will never realistically be able to maintain. So it’s up to you to be incredibly honest with yourself about what purchases are really within your means.
3. Entices You to Buy Things You Don’t Really Want
Did you know that the average online retailer pays 4-6% of the total item price in fees every time someone uses the BNPL button at check out? That is at least double the cost of most credit card processing fees! So if BNPL is so expensive to the retailer, why does it seem like nearly every company offers some sort of BNPL option on their website now?
It’s because the research shows that consumers buy a lot more stuff when they can make those purchases through BNPL. In fact, one well known provider, Affirm, bragged to their investors that shoppers who made purchases using their BNPL platform spent 85% more money per order than shoppers using other payment methods! Other companies claim slightly more modest increases in Average Order Value, with only 40-60% more money spent. But the end result remains the same: people spend more money and buy more things when they can use BNPL.
Now, this is great news for the bottom line of online retailers! But is it good news for the average consumer? Or are Buy Now Pay Later apps just tempting people to buy extra stuff that they don’t need?
And that’s the harsh reality of BNPL programs. They let you use your future money to buy things today that future-you may not actually want that much. And if the you-of-today doesn’t want this purchase enough to pay full price (or commit to the discipline of saving up for it in advance), then it’s probably a safe assumption that the you-of-the-future is going to wish that you didn’t lock yourself into a payment plan for it.
4. Adds Complexity to Your Finances
Speaking of value: how much is your time and mental energy worth to you?
As a working mom with a kindergartener and a baby on the way, I will do pretty much anything these days to free up a couple of extra minutes of precious mental space. The name of the game for preserving my sanity lately—especially during this pregnancy—has been simplification. I’ve been fine-tuning my meal planning, school schedule, and household routines to require as little mental energy as possible on a day-to-day basis. And our finances are no exception.
I’m all about the auto-pays and simplified budget categories right now, and you couldn’t pay me enough to sign up for any sort of new bill or financial program that would require me to put in additional effort to keep track of it or make payments.
But BNPL programs are inherently complicated. They can have unusual payment schedules and unpredictable payment amounts. You have to sign up and pay through special apps for some of them, and there are specific criteria for avoiding late fees or interest charges to which great care must be given to avoid mistakes.
And then there is the fact that you must budget for and stay on top of each BNPL installment plan individually. Every BNPL purchase that you make becomes its own, separate loan—each with its own loan terms and timelines.
The effort it takes to stay on top of these bills has real costs associated with it, even when the BNPL program says that it is “free.” You have a finite amount of time and mental energy, and if you spend it juggling payment plans in your budget, you are not going to be able to use that energy to do other things like more cost efficient meal planning, or playing with your kids, or even just staring at the ceiling to clear your head for five minutes at the end of a long day.
If I’ve discovered anything in this current season of my life, it is that my time is my most valuable asset. BNPL programs cost time and energy—and you cannot neglect to count those costs when deciding if you want to sign up for one.
5. Opens the Door to Costly Mistakes
No one wants to see their “interest-free” BNPL plan become the most expensive purchase of the year just because of one missed payment. But unfortunately, that’s exactly what happens to a lot of people.
You might think that you will never be the person who forgets to login to make a payment or gets behind on your 24 months of interest-free financing, but the odds are not necessarily in your favor. 10.5% of borrowers paid at least one late fee in 2021, and some of those users were slapped with disproportionately large fees (relative to the size of the original loans) or paid multiple fees for the same late payment. BNPL companies have so far managed to stay mostly outside the federal protections that require clear disclosures about late fees and appropriate caps on the size of those fees—so it can be difficult to predict exactly what the consequences for a missed BNPL payment will be until the day you accidentally have one.
The only way to avoid making these mistakes is to pay extra special attention to every single BNPL program, app, and individual purchase that you sign up for. Do you understand the unique terms of each loan that you’ve taken out? Do you have enough cash in your accounts on the right dates to make on-time payments? Will automatic payments for BNPL installments compromise any of your other important bills and financial obligations?
The more BNPL programs you sign up for, the more mental energy you must expend to stay on top of those payments, and the more likely you are to ultimately slip up and make a mistake on one of them.
And it gets even worse! Even if you never miss a due date or have any sort of miscalculation with your BNPL plans, if you ever need to return an item or dispute an order that you paid for through BNPL, you may find that you are still on the hook for those installment payments. Unlike traditional credit cards, which are required in the US to provide consumers with the option to stop payments when they open a dispute with a merchant, BNPL programs are exempt from providing that type of protection. According to the Consumer Financial Protection Bureau, the number one complaint against BNPL providers are the hurdles that consumers must jump through if they have any type of problem or return with their purchases.
The bottom line is that BNPL programs open your finances up to the possibility of some very expensive mistakes. There are a lot of moving parts with BNPL that have the potential to cause a lot of headaches if anything goes sideways. While we always hope that everything will go according to plan, the truth is that the cost of potential mistakes is something that should always be factored in when considering the total costs of taking out a loan.
At the end of the day, there are a lot of costs associated with taking out loans beyond just the stated interest rates.
Buy Now Pay Later apps claim to offer interest-free financing with no hassle and a soft credit check. But in all of the other ways that you could evaluate the cost of a loan—additional fees (particularly late fees!), overall complexity, the hassle of dealing with returns, and the not-so-subtle ways that users are encouraged to buy more things than they want or can even afford—BNPL programs are actually very, very expensive.
So the next time you are tempted to use Buy Now Pay Later apps to cover those larger purchases, don’t forget to account for the whole cost of that installment plan when evaluating your options. You might find that it is actually quite a bit cheaper to cover the full cost upfront from other priorities in your budget. Or maybe even just hold off making the purchase altogether!
The best option for avoiding the temptation of Buy Now Pay Later apps is to get a big picture perspective of your finances and priorities. Download the free YNAB DIY Budget Planner workbook and learn how to change your money mindset over the course of five short emails.