This is an excerpt from Dollar Scholar, the Money newsletter where news editor Julia Glum teaches you the modern money lessons you NEED to know. Don't miss the next issue! Sign up at money.com/subscribe and join our community of 160,000+ Scholars.
I’m a list girlie, through and through.
Every morning, I flip to a new page in my Field Notes steno pad and write out the tasks I have to complete during the workday. When I was in high school, all my AIM away messages were to-do lists of various homework assignments. Before I go on vacation, I always compile a Google Doc of nearby attractions, and in my phone’s Notes app, I keep a running schedule of my upcoming concerts.
Creating lists allows me to organize my thoughts and work through things one step at a time without feeling overwhelmed. Lists also help me make rational decisions about my money. That's true for day-to-day decisions — after all, it's easy to avoid impulse buys at the grocery store if I bring a shopping list — as well as bigger, longer-lasting ones.
Enter buy now, pay later programs, or companies like Klarna, Affirm and Afterpay that let customers break up expensive purchases into smaller, more manageable payments made over time. Abbreviated BNPL, I wrote about them in February 2020. But a lot has changed in the past two-ish years.
Given how much BNPL services have proliferated, I want to revisit the subject — this time, using my trusty list method.
I consulted a trio of experts to help me put together a quick list of questions I should ask myself before I take the BNPL plunge. They included Melissa Feldsher, head of lending innovation at Chase; Kaitlyn Haney, financial advisor at Fort Pitt Capital Group; and Eric Schuppenhauer, head of consumer lending and national banking for Citizens. Here’s what we came up with.
How big is the purchase?
Buy now, pay later services have their roots in the layaway programs of old, where retailers would hold higher-priced items like jewelry for customers who agreed to pay in installments instead of handing over a check up front. But now they cover purchases of all sizes: I can pay for my Sephora makeup haul with Afterpay or Klarna. Overseas, there are even options to buy now, pay later for DoorDash fast food orders.
However, Haney advises limiting my use of BNPL to essential items. The plans may make frivolous purchases “even more appealing when you can rationalize the price over the next few weeks or months,” but I should avoid the temptation.
“For someone who is responsible with their debt, I recommend using these plans, when offered, if you are making a larger purchase like a television or appliance,” she says. “Especially for those individuals who are looking for ways to stretch their income or might not have credit to secure financing.”
If I don’t really need something, I certainly don’t need to enter into a BNPL agreement for it. That’s a slippery slope — and one to best avoid entirely.
Can I actually afford to buy now, pay later?
Using a BNPL program should not be a random decision I make on a whim simply because it’s offered on a flashy checkout page. I should carefully consider my overall financial picture and think about whether I can actually afford the monthly payments.
“Avoid overspending and overwhelming your budget by committing to too many payment plans at once,” Feldsher says.
Depending on my situation, it might be smarter to put the purchase on my credit card. Schuppenhauer suggests I do the math, looking at how much the BNPL program will charge vs how much I’d rack up in interest if I let the debt revolve on my credit card. Then I can choose whatever’s cheaper.
“Not every purchase needs to be stretched over the course of six weeks,” Haney says.
What, exactly, am I agreeing to?
Though the Consumer Financial Protection Bureau is working on it, BNPL services are largely unregulated right now. That means all the companies have slightly different approaches, so it’s easy to opt in without really understanding a firm’s terms and conditions.
Feldsher says I should closely review the fine print, looking at fees, interest rates and the potential impact to my credit. I’ll also want to check the expectations for when I’ll need to pay up. With Afterpay, for instance, I generally pay 25% up front and the rest over six weeks. Klarna has a 30-day option where I can delay that first installment by a month, as well as a financing option where I can stretch payments out for up to 36 months.
FYI: BNPL return policies can also be finicky, as the Wall Street Journal reported in June.
Can I set up automatic payments?
Most BNPL apps are free… unless I miss an installment. I should note these consequences, which tend to differ from service to service. Affirm says it doesn’t charge late fees, for example, but Klarna will charge me up to $7 if a scheduled payment is still missing after 10 days.
To avoid late fees — and hurting my credit — Schuppenhauer suggests setting up automatic payments. It’s also crucial for me to keep track of how many BNPL agreements I have going at once. According to one recent survey, 41% of BNPL users have had multiple accounts open at the same time. Of them, 48% said they’ve missed a payment.
“Be mindful of how many plans you have active at once, as it can be hard to track, and your total monthly payments on these plans will add up quickly,” Haney says.
The bottom line
Buy now, pay later programs can be a useful tool, but they come with risks. I can’t afford to be careless.