Guest post by FitMoney.org
Have you ever been online shopping and, right before you confirm your purchase, you see an offer to not pay everything today? These offers are a fairly new type of loan becoming increasingly popular across online retailers known as Buy Now, Pay Later.
Buy Now, Pay Later programs offer an appealing way to shop online without paying in full at the time of purchase. It can be a lot easier to shop when it doesn’t feel like you’re paying as much–but that’s exactly why it’s important to know a bit more of what goes on behind the scenes of these offers.
Before you check out, there are a few things you should know. Who is really making the purchase? What payments are you committing to? You might be surprised to learn you’re not really paying for that item–at least not yet!
What Is Buy Now, Pay Later?
Buy Now, Pay Later programs allow you to purchase items now and pay for them later, usually within a set period of time with no interest or late fees. If you’ve done some online shopping lately, you may have heard of Klarna and Afterpay, two popular Buy Now, Pay Later services.
Similar to a loan, these services are paying for your purchase up front alongside your initial payment to the service. Then, over the course of a predetermined period, you’ll make additional payments until the initial cost is paid to the service. It’s important to remember that by entering into a loan agreement through these services, you’re still responsible for making payments on the agreed-upon date. Failure to do so could result in late fees and other penalties.
As of now, Buy Now, Pay Later companies aren’t reporting on-time payments to credit bureaus, but missed payments can negatively impact your credit score. It’s important to remember that, although easy to use, Buy Now, Pay Later loans can impact other areas of your financial health. These services are still fairly new, so be sure to do your research on how the loan could impact your financial future.
How do Buy Now, Pay Later programs work?
When using a Buy Now, Pay Later program, you’ll need to provide your payment details such as bank account or credit card information. This is so the lender can set up automatic payments to be deducted from your account on the agreed-upon date.
With these services, it’s not you paying the retailer. Though you receive your purchase immediately, the Buy Now, Pay Later service fronts the bill. Then, you owe that service the remaining cost of the order beyond the initial payment.
It’s important to note that when signing up for these services, you’re entering into an agreement that must be adhered to or there could be consequences. Be sure to check all terms and conditions before signing up for any loan agreement.
Why are retailers using Buy Now, Pay Later?
Buy Now, Pay Later services are a solution to a major problem online retailers have: cart abandonment. Have you ever received an email saying “Don’t forget what you left in your cart!” These programs make it easier for customers to click “place order” before any second thoughts because it can feel like we’re not paying as much as the order costs. This is why retailers are interested in these services despite you not paying them directly.
How can I use Buy Now, Pay Later safely?
1. Make sure you can afford the item in full before agreeing to a loan agreement.
2. Always read all terms and conditions before committing to any loan contract.
3. Keep track of your payments and make sure you know what is owed and when it’s due.
4. Ensure you have an available balance to cover charges as they may be automatically withdrawn.
Like many financial choices and decisions, it’s important to educate yourself on if it’s right for you. Remember, using these services aren’t necessarily a bad choice. However, the best choice is making sure you’re set up to fulfill all promises and expectations upon entering the loan. Even just forgetting how many payments you have left or how much you still owe can make these payment plans risky.
About the Author
For more resources, lessons, and activities, visit FitMoney.org. FitMoney is a philanthropic nonprofit providing unbiased financial literacy programs to help K-12 students develop life skills for a financially fit future. Created by teachers and receiving four stars from CommonSense Education, FitMoney’s accessible financial literacy programs cover critical financial topics to meet students where they are – in the classroom, at home, or on-the-go! FitMoney works with educators and families on instructor-led tools, independent learning platforms, and multimedia resources (The FitMoney Podcast) to empower and pursue a future of financial literacy for all.
