For Christmas shoppers who signed up for those buy now, pay later plans, the holidays are over and it’s time to pay up — maybe more than you expected. So Consumer Reports is here to make sense of these short-term loans with important advice on how to dodge costly fees and what to do next time.
Some of the plans offer no-cost or low-cost terms up front, but now that those gifts have been opened and payments are due, be careful. They can get very expensive if you miss a payment or are not paid in full when the promotion period ends. Late fees can range from a few dollars up to 25% of the loan amount.
Payments that are made late, which is 30 days or more, might get reported to the credit bureaus and negatively affect your credit score.
Next time, Consumer Reports said there might be better options than buy now, pay later plans.
First, look inside your wallet. Especially for expensive purchases, or if you think you might return something, consider using a credit card instead. Aim to pay the balance off as quickly as possible. You may earn reward points and will have consumer purchase protections in case you have trouble with the merchant or the item you purchased. Buy now, pay later loans usually don’t offer protections.
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If you don’t have a credit card, talk to your bank or credit union. Or if it’s a larger purchase, consider a personal loan. Interest rates average just under 11% for a three-year loan.
Finally, if you decide to buy now and pay later, see if you can pick the traditional pay-in-four plan. That’s when you’ll make four payments over six weeks with no or very small fees as long as you pay on time. And no matter which plan you pick, autopay ensures your bill is always paid on time.
One more caution about buy now, pay later: Returns can be a hassle since you sometimes have to contact the seller and lender before you can stop making payments, a process that can take several weeks.
Here’s what you need to know about these longer-term loans being offered by buy now, pay later companies.
3 main risks
Because they are still relatively new, Chien said regulators haven’t yet looked closely at longer-term, interest-charging BNPL loans — but that they should, given that 11% of consumers who’d gotten a buy now, pay later loan in 2021 had one that charged interest, according to a survey from the Financial Health Network conducted that year.
BNPL companies say these longer-term, big-dollar loans benefit consumers. For example, PayPal said its Pay Monthly loans, which can be used to make purchases up to $10,000, don’t require a down payment, which may be helpful for customers who lack the funds needed to initiate a purchase. The company also touts that it runs promotions of 4.99% interest rate loans from time to time.
Affirm said that its longer-term loans, up to $25,000, are a credit card alternative and that even though they can carry interest rates up to 36%, it is calculated as “simple interest”— charged just once to a consumer — instead of charged monthly (compounded) as some credit cards do.
Klarna said its longer-term loans can help people purchase big-ticket items, and that its interest rates top out at 29.99%. Sezzle declined to comment.
Still, for CR’s Chien, longer-term buy now, pay later loans may have some unexpected downsides that consumers should be aware of.
It’s an expensive way to borrow money.
While it’s true that there can be low-cost promotional offers, in general, these loans can be very expensive and charge high fees for late payments, said Ed Mierzwinski, senior director for the federal consumer program at the U.S. Public Interest Research Group (PIRG).
In addition to levying interest rates as high as 36.99%, “if you fail to make a single payment in a timely manner, you could get socked with late fees around $30 or more,” he said.
In fact, a long-term buy now, pay later loan could be even more expensive than charging the purchase on a traditional credit card, assuming you have one. For example, a $2,500 buy now, pay later loan paid in 24 months with an APR of 36.99% would cost $1,074 in interest, vs. $672 at 24%, the average for credit cards, according to the online lending marketplace Lending Tree. Also, while many credit cards offer valuable reward points and come with important purchase protections, these monthly loans do not. (See below for more on that.)
Your credit score could suffer in two ways.
For one, the application process for some longer-term buy now, pay later loans could involve a “hard” check of your credit score. That can ding your score by up to five points each time, said Chi Chi Wu, senior attorney at the National Consumer Law Center.
And it can take as long as 12 months before those lost points are restored, Wu said. While that may not be a big deal for most folks, for others it could make a costly difference. If you are also applying for a mortgage, say, the loss of a few points on your score could mean having a Fair credit score instead of a Good one, which in turn could translate into less favorable loan terms and higher rates.
The second problem: As with credit cards, buy now, pay later payments made 30 or more days late may be reported to the credit bureaus and negatively affect your credit score, Wu said.
In August 2022, CR conducted a nationally representative survey of 2,013 U.S. adults who have used BNPL. Of the people who missed a payment, over a third said it was because they simply lost track of the deadline. To prevent that, CR’s Chien recommends setting up automatic payments, and once you do, double-check that it works. That’s because in the survey, of those who reported missing a payment, 16% said they believed they had set up auto pay, but the payment was not made automatically as they expected.
Purchases may not be protected as they would be with a credit card.
When you make a purchase using a credit card and never receive the item or wind up returning it, you have what are called “chargeback” rights, Mierzwinski said, meaning you can call the credit card company and legally stop the payment from going through if it hasn’t already been credited.
This is not the case when you buy something using a short- or long-term buy now, pay later loan. If you need to return a product or never receive it, you have to contact the seller (and it’s a good idea to also contact the lender) before you can stop making payments and be refunded any money you may have already paid, a process that’s a hassle and that can take several weeks, according to the Consumer Financial Protection Bureau.
Consider what happened when a consumer in Maryland purchased $5,600 of furniture with a buy now, pay later monthly loan. According to a CFPB complaint, delivery of several items totaling $790 was delayed before the seller canceled the outstanding part of the order. However, the consumer had already paid the buy now, pay later loan in full — and wanted a refund. The person couldn’t get the BNPL company to reopen the account and get the credit from the seller.
If you use a buy now, pay later loan, the risk that this could happen to you is not small. About 13% of all purchases in 2021 were returned, according to figures from the CFPB. In CR’s survey, 4% of people who have used buy now, pay later said they had difficulty stopping payments after they returned an item, and 5% said they had difficulty getting a refund.
Chargeback rights are among the many buy now, pay later policy prescriptions Chien thinks are necessary.
“Consumers should also be granted chargeback rights with buy now, pay later loans of any length and certainly not be required to continue payments for any length of time on items they’ve already returned or never received,” she said.
What’s a shopper to do?
Paying for purchases in full, whenever possible, is ideal, said CR’s Chien. It keeps you from taking on debt and relieves you of having to track payments for your purchases. Paying in full can include putting the charge on a credit card, the balance of which you intend to pay off immediately.
But if you have to finance a purchase over time, “shop around and compare your options,” Chien said.
“If you’re looking for a longer-term installment loan, your best bet could be your credit card, it could be a loan from a bank or credit union, or it could be a plan from the retailer,” especially when a promotional rate is being offered. “Whichever you choose, be sure to read the fine print so you know what you are getting and what fees or other charges might be involved,” Chien said.
Here are your best courses of action for different types of purchases you might make.
Can’t afford a small purchase, or don’t have a credit card?
Consider a traditional pay-in-4 loan if you are certain you can repay it in six weeks. But be sure to set up autopay so you won’t miss a payment. (In CR’s survey, nearly a third of buy now, pay later shoppers paid for their last BNPL purchase with manual payments, which can be risky.)
Can’t pay all at once for a large purchase?
If possible, charge the item or service on your credit card and pay the balance off as quickly as possible. You may earn reward points and will have consumer purchase protections that buy now, pay later loans don’t offer, saud U.S. PIRG’s Mierzwinski.
Need to make a larger purchase but don’t have a credit card?
Talk to your bank or credit union. Many offer small- or medium-sized personal loans with reasonable terms — three-year loans at both types of lenders currently average about 10% interest, according to the National Credit Union Administration. If you need to build up your credit file or want to improve your score, making timely payments will help you do that because these loans are typically reported to the credit bureaus. Another benefit: You can use the funds for multiple purchases, or to pay down other, more costly debt.
Need another way to finance?
You could still consider a monthly loan from a buy now, pay later company — ideally if you can snag a low promotional rate. But remember, these loans are least potentially problematic if you’re buying something that you are certain will be delivered to you in a timely way and that you don’t expect you’ll have to return. To keep the costs as low as possible, make on-time payments to avoid late fees.
