The Ugly Truth Behind Buy Now, Pay Later Programs

As you’re looking for online purchases, you might have noticed some companies offer a “buy now, pay later” program such as Klarna or Afterpay that allows you to pay for a product through several smaller payments instead of paying for you purchase immediately. This can seem helpful to people who are making big online purchases, but this simple system is more complex than it seems, and you should know all the facts before considering using these programs.

The program works like a regular transaction but instead of paying the full amount upfront, customers pay installments of lower prices until the products is completely paid off over the course of several weeks or months (depending on the service terms). The interest for this payment program comes with an enticing 0% interest rate for payments but these programs utilize point of installment loans to offer the buy now, pay later program.

This is a lucrative business as by the beginning of 2021, the use of these programs increased by 215%. These programs seem tempting as customers aren’t’ required to pay interest right away and the programs are easy to sign up for in seconds.

This might seem like a good program to help people lacking the funds for certain purchases, but these programs give customers a reason to buy something they otherwise wouldn’t consider or didn’t intend on buying at all. This can lead customers to overspend with a survey indicating shoppers would not have made the purchase if this program wasn’t available.

The best mentality to have when shopping online is considering whether the product, you’re looking for isn’t something you planned to purchase, immediately need, or products you would pay full price for you probably don’t need it. It’s recommended to not be lured in by a sale simply because it’s on sale and you have the option to make payments through installments through spending money you don’t have.

These programs can also encourage customers to continue spending more using the payment programs that starts a continuous cycle of unnecessary spending that can be hard to break. These payment programs offer 0% interest but only if you pay on time, if you miss a payment they can charge up to 30% interest.

Most customers who opt to use these programs is often because they have no credit, low credit, or are unable to get credit as these people often don’t qualify for traditional credit. The lenders take advantage through a limited credit check while the lenders take advantage of this circumstance by charging heavier interest rates and fees.

For example, some payments can occur quickly every two weeks and if you buy something for $120 but if you miss one payment of $30, the lenders can apply penalty fees on top of 30% interest. Many customers think of this payment system as a way to help build credit, but this isn’t the case with most payment programs.

Many of the payment programs do not report to the major three credit bureaus leading customers digging themselves into a hole with zero benefits for the customer. There are a couple of things you can do to avoid this unnecessary spending and will help you use your money wisely.

Don’t scroll on shopping websites when you feel bored, having nothing to do, emotional, lonely, or tired as your guards are down. One way to manage this is buy not scrolling through online stores out of sheer boredom. Another suggestion is making a list of products you’re thinking about buying along with the price, then revisit your notes 5-7 days later to revisit your options and whether the purchase is necessary with more time to think about it to avoid impulse buys you might regret later.

Another recommendation is shopping with a well-defined list, sticking to the list to avoid any impulse buys. You can place products you find on your wish list so you can wait to see if the price will drop to buy in the future at a discount, you can wait to have enough in your budget to afford the product, or you can possibly realize you don’t need it.

If you’re looking to build credit, you can try opening a secure credit card that often requires a down payment that you can spend until the funds are depleted that will be reported to the three credit bureaus. This will help you avoid over-spending and possibly accumulating a large amount of credit card debt.

So, the next time you’re shopping and feel tempted to sign up for a payment program remember to read the fine print to ensure you won’t overspend on installment payments if you miss a payment. Also try some of these tips to help avoid impulse buys that will help to manage your money wisely.