Whenever I see 0% APR financing, I stare at the terms and conditions like a young Indiana Jones in Raiders of the Lost Ark:
Our generation is smart enough to know that 0% APR financing is a trick or a trap of some sort. But we’ve gotten this far… times are hard, money is short, and we could really use that interest-free financing on our new Peloton.
So with great trepidation, we take the deal. And just as we think we’ve gotten away with it, we hear gears turning and mechanisms cranking behind us…
Is it possible to “escape” the potential pitfalls of 0% APR? Absolutely. But is it worth the risk? Usually not.
This is absolutely the case with buy now, pay later services. They may seem as innocuous as a little golden idol resting on a stone pedestal — but as soon as you take the bait, you trigger a bevy of traps that can skewer your finances.
What Is Buy Now, Pay Later?
As the name implies, buy now pay later (BNPL) is an option at checkout that lets you pay for big-ticket items in equally priced installments over time.
Some big names you might’ve seen in the buy now, pay later space include Afterpay, Klarna, and Affirm:
Here’s how using a buy now, pay later service works, in a nutshell:
- During online checkout, you click the option to buy now, pay later.
- The buy now, pay later service performs a soft pull of your credit to ensure that you qualify.
- After you’re approved (typically within seconds), you’ll make a small down payment (typically 25%).
- Then, you make equally sized payments at regular intervals until the item is paid off.
A common buy now, pay later plan is to pay 25% every two weeks until the item is paid off. For bigger ticket items like Pelotons, you may pay a small percentage of the balance every month for up to three years.
Read more: The 6 Best Buy Now, Pay Later Apps
What Stores Let You Buy Now, Pay Later?
Unsurprisingly, the popularity of buy now, pay later services exploded during the pandemic and has only ramped up amid current inflation and recession worries.
How popular are we talking? Well, as of March 2021, over 61% of 18- to 24-year-olds said they had used a BNPL service. Just one year earlier, that number was closer to 38%.
Not only that, but the global buy now pay later market size was valued at a whopping US$132 billion in 2021, with North America accounting for about 30%, or $39.6 billion, of those sales. Even more, BNPL worldwide is expected to grow to a mind-bending US$3.68 trillion by 2030.
Part of the rising popularity of BNPL is due to their growing presence on major shopping sites. Walmart, Saks, Nike, Best Buy, GameStop, Lululemon, H&M, and hundreds more retailers offer BNPL at checkout. Any site offering PayPal also counts, since they offer BNPL now, too.
Finally, time to address the big Bezos in the room. Yep, Amazon has partnered with Affirm and offers BNPL on many items priced over $50.
Pros & Cons of Buy Now, Pay Later
If you were about to raid a dangerous tomb to score some Aztec gold, wouldn’t you want to know where all the traps were?
Let’s review the advantages and risks of using buy now, pay later apps and services.
There’s no denying that BNPL is convenient. In fact, it might even be the most convenient way to take out a loan — just click that blue Affirm button at checkout, and bingo – that PS5 is yours for $125 instead of $500.
Pro: Qualify With a Soft Credit Check
It’s also nice (I suppose) that BNPL lenders perform a soft pull of your credit to qualify you. Auto and mortgage lenders always perform hard credit checks before loaning you money.
Read more: Soft Pull vs. Hard Pull: How Each Affects Your Credit
Pro: 0% APR Financing… If You Do It Right
Finally, it’s worth addressing that if you need 0% APR financing and you manage to avoid the “traps” by making every payment on time, buy now, pay later can make sense.
Buy now, pay later can be a useful financing tool if nothing goes wrong.
But a lot can go wrong.
Con: It Could Lower Your Credit Score
Imagine getting charged a higher interest rate on a 30-year fixed mortgage, or being unable to refinance your student loans, simply because you missed a single payment on your $200 Jordans.
Sorry to sound alarmist or hyperbolic, but that’s literally what’s at risk here. Your credit score dictates your interest rates on future loans and even your ability to receive them in the first place. When you’re young and without much credit history, your credit score is also extremely fragile; a single missed payment to your buy now, pay later lender, and BAM — you’re down 20 points.
Now, if you don’t miss a payment, it won’t affect your credit score. It might even help it (but not any more than using a credit card).
But still. Is it worth jeopardizing your future mortgage rate over a pair of J’s?
Con: Missing a Payment Can Stick You with Very High Fees
If you miss a payment to your buy now, pay later lender, your credit score isn’t the only thing impacted.
The next “booby trap” you trigger is a rather nasty twofer: late fees and/or high APR. Miss a payment and Klarna will instantly add up to $7 to your next payment. With Afterpay, it’s up to $8.
Affirm likes to flex that they don’t charge late fees — but they do charge up to 36% APR, which depending on the balance can actually exceed its competitors’ fees.
Con: Returning Items Can Be a Convoluted Mess
Let’s say you buy a $500 Coach purse on your credit card. The purse arrives damaged, so you request a return. Coach sends you a label, you send it back, and as soon as they see it’s in the mail, they credit $500 back to your card. Easy.
Now let’s say you financed the purse instead using BNPL.
You paid $125 upfront, returned the purse, and your $125 doesn’t come back.
That’s because Coach needs to credit your buy now, pay later lender, who then credits you.
But this can be “a long ordeal,” according to Consumer Reports, as BNPL platforms are not designed to process returns or facilitate disputes.
Con: Fewer Consumer Protections
Americans have been using credit cards since the 1950s, and in that time we’ve been granted layer upon layer of consumer protection. The Fair Credit Billing Act protects us from fraud and bad math, and our own credit card companies offer purchase protection and tend to take our side in disputes with merchants.
Buy now, pay later services, by contrast, are new — and don’t contain the same protections. Governments are scrambling to build legislature around them, but in the meantime, consumers are left dealing with three companies in the event of a dispute: their card company, the merchant, and their BNPL lender.
It’s messy, and you risk falling through the cracks.
Con: It Encourages Impulse Spending
I’m not saying this is you, but buy now, pay later apps are luring thousands, perhaps millions of consumers into buying things they can’t actually afford.
A TransUnion study found in general, buy now, pay later users tend to struggle more with debt than the general population. More damningly, 20% of BNPL users end up increasing their credit card debt by more than half.
Should You Use Buy Now, Pay Later Services?
Not unless you need to.
In 99% of cases, it’s just not worth risking:
- Your credit score
- Late fees
- 30% APR
- A stressful return process
- Accidentally buying something you can’t afford
That being said, I do think there exist rare cases when using BNPL might make sense.
Read more: When Is It Better to Finance a Purchase Than Pay Cash?
When Should You Use a Buy Now, Pay Later Service?
Here are a few cases when you might consider a BNPL purchase:
- Avoiding credit card debt. If you put a $1,500 Peloton on your credit card and can’t pay it off at the end of the month, you’ll be immediately hammered by your card’s regular APR. At least with BNPL, you get temporary 0% APR financing.
- Stretching a big purchase across multiple monthly budgets. Similarly, if you only allow yourself $500 monthly on nonessential purchases, stretching your $1,500 Peloton across three months may help with budgeting.
Is There a Better Option for 0% APR Financing?
If you’re saving up for a major purchase and are considering BNPL, consider a credit card offering 0% APR financing instead.
Unlike a BNPL contract, all purchases made on a 0% APR card have interest-free financing for 12 to 18 months (generally), and you don’t have to worry about missing scheduled payments and late fees.
A 0% APR card also offers all of the consumer protections that BNPL doesn’t.
Of course, you’ll need good credit to qualify for the best cards, and opening a new line of credit involves a hard credit pull. But all things considered, it’s a safer, more flexible, and much more rewarding way to get an interest-free loan than buy now, pay later.
Here’s our list of the best 0% APR credit cards.
The Bottom Line
Like an ancient, treasure-filled tomb, buy now, pay later contracts are filled with hidden traps and pitfalls. Missing a single payment could instantly result in late fees, high APR, or worse: a ding to your credit score, which could impact your interest rates on your home or auto loan.
Even if you navigate the tomb unscathed and make every payment, you’re still vulnerable to lesser consumer protections and a cumbersome dispute/returns process the whole time.
Buy now, pay later may make sense to avoid credit card debt or balance your budget, but in most cases, a 0% APR rewards card is a superior alternative.