INDIANAPOLIS — Michelle Cloutier of Indianapolis occasionally uses “buy now, pay later” services while shopping.
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“I go to Amazon and Affirm is already right there,” Cloutier said.
Buy now, pay later (BNPL) services are short-term loans which allow a consumer to buy an item immediately and then, pay in interest-free installments over a period of time.
"This is a convenience thing that can be such a slippery slope,” Cloutier said. “It becomes easy. If I do it this time, then next time I’ll do it even easier and then by then you’re living on it."
A new LendingTree survey found that 41% of buy now, pay later users made at least one late payment in the past year, up from 34% previously, with many borrowers using BNPL for everyday expenses rather than occasional splurges.
Cloutier was once $20,000 in debt from credit cards, so she makes sure to make any BNPL payments on time.
“Yes, because in my previous lives I got burned, in my 20’s,” Cloutier said.
National nonprofit, Money Management International, says many consumers are making more late payments.
“When that happens, you can get hit with fees and if you default on it, it can end up on your credit report,” Thomas Nitzsche, VP of public relations at Money Management International said. "When you're juggling those BNPL payments with other financial obligations like credit cards, student loan, auto loan, housing payments, utilities, it could potentially push some people over the edge if they're not very careful."
Most BNPL loans don't charge interest, but they do charge late fees. These fees vary by lender and they rarely exceed $10 per late installment, but if you're juggling multiple BNPL loans and a tight budget is the main reason why you missed payment, the added strain of a late fee is only going to make it harder to get caught up, according to Money Management International.
Cloutier is using credit counseling at MMI to get out of debt.
“Really the first thing you have to do is figure out a working budget,” Cloutier said. “If you’re using these services as a patchwork for a broken budget, it’s going to fail. It’s putting a Band-Aid on the Hoover dam.”
According to data reported by the Consumer Financial Protection Bureau, that 96% [papers.ssrn.com] of BNPL loans are repaid in full and on time.
“Consumers value BNPL as an alternative, low-cost payment option to manage their finances at a time when prices are on the rise," said Miranda Margowsky, Head of Communications at the Financial Technology Association, said in a statement to WRTV. "Our member companies consistently report less than a 1% charge off rate and low rates of late payments, showing that consumers are paying their BNPL loans.”
TIPS FROM MONEY MANAGEMENT INTERNATIONAL
- Create a list of your BNPL loans
The nature of BNPL loans (small amounts, quick approval) make it possible that you're not even totally clear on how bad the situation has gotten. To get back on track, list out every active loan: include the provider, the balance, the due date, and the payment amounts.
- Assess your situation
Once you've got a complete picture of your buy now, pay later debt, you need to determine how to proceed.
If the debt is big, but manageable, you may just need to set up automated payments, avoid adding new debt, and wait until everything's been paid off.
If the debt is too big to handle with your current income, you'll have to figure out the best way to get around that barrier:
- Create a temporary source of additional income with a side hustle or part time job.
- Use a debt consolidation loan to clear away the debts and leave you with a more manageable (though likely more expensive) monthly payment.
- Work with a nonprofit credit counselor to update your budget, review your options, and create an affordable repayment plan.
