Avoid the risk of having to buy multiple loans now and pay later

Buy Now, Pay Later promises simple payment plans that can make financing your next purchase easy and affordable.

These plans usually split your total purchase into four equal installments with no interest. The first installment is due at checkout, with the remaining three being due every two weeks until the loan is paid in full.

But even a simple payment schedule can get complicated when you’re juggling three or four of them at once — a problem that’s unique when you buy now, pay later, and unlike other forms of financing, don’t mind similar existing debt when extending an offer.

KNOW THE RISKS OF MULTIPLE BUYS NOW, PAY LOANS LATER


While certain debts, like credit cards and traditional loans, are reported to the big three credit bureaus, buy-now-pay-later loans typically aren’t, so lenders don’t know how many loans you owe and your ability to pay can’t appreciate anymore.

That’s likely to change in the coming months as TransUnion, Equifax, and Experian work to increase the visibility of “buy now, pay later” on credit reports to better track loans with lenders while improving consumer creditworthiness Protect who may take out multiple loans Pay off loans in a short time and successfully.

For now, borrowers can continue to borrow from multiple vendors who buy now and pay later. And although plans are advertised as free, the consequences of being behind are anything but, says Marisabel Torres, director of California policy for the Center for Responsible Lending, a nonprofit research and policy organization.

“There needs to be more transparency,” she says. “It’s not just ‘no funding, no fees.’ If you miss a payment, fees will apply. There will be some kind of punishment imposed on you.”

While many “buy now, pay later” providers charge late payment interest that can further indebted borrowers, others send delinquent loans for collection, putting borrowers’ creditworthiness at risk.

There are also consequences on the other side of the transaction. Even if a “buy now, pay later” provider doesn’t penalize you for defaulting, your bank might if you overdraw a credit-tied account like a debit card.

“Can’t you trigger sufficient fund fees or overdraft fees? Could you be kicked out of the banking system? Those are very real consequences of not being behind on a loan payment,” says Torres.

CREATE A BUDGET FOR BUY NOW, PAY PAYMENTS LATER

For borrowers who buy multiple loans now and pay later, the most important thing is to plan their spending ahead of time, says Jordan Nietzel, a board-certified financial planner based in Columbia, Missouri.

If you don’t already have a monthly budget, start by reviewing your income and expenses over the past three months to see how much money is coming in and going out.

Assuming there is excess income that you want to spend on the purchase now, pay for future purchases, set an overall dollar limit on monthly payments rather than evaluating loan offers individually.

Nietzel says that looking at buy-now, pay-later loans as a whole is especially important because the small installments make the debt seem more manageable than it is.

“We tend to think, ‘Well, no big deal, I can definitely make that $10 a month payment,'” he says. “You don’t realize that these payments are stacking up on top of each other if you do this multiple times.”

RESIST THE TEMPTATION TO SPEND TOO MUCH

Budgeting can also help address one of the biggest concerns about “buy now, pay later”: the ease of overspending at the checkout.

Because Buy Now, Pay Later plans automatically split your purchase, it’s easy to lose track of what you originally intended to spend. For example, a $100 purchase becomes $25 on a pay-in-four plan. For some shoppers, this could mean adding more items to their shopping carts.

Paul Paradis, president of Sezzle, a buy-now pay later provider that works with Target and other retailers, says his company does little to encourage customers to overdo it.

“Because we don’t charge interest and derive the majority of our revenue from our merchant fees, we actually lose out by encouraging overspending,” he says. “Unlike credit cards, which make money if people don’t pay us on time, we lose money if people don’t pay us back on time.”

However, Nietzel and Torres note that the willingness of large retailers to pay merchant fees upfront is likely to encourage consumers to spend more.

If “buy now, pay later” plans tempt you to overspend on a regular basis, you’d better ditch them.

“It might seem like your cash flow is easier to bear, but over the long run you’re paying the same amount,” says Nietzel. “So if you’re buying more than you would otherwise have, it really becomes a problem.”

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This article was provided to The Associated Press by personal finance website NerdWallet. Jackie Veling is a writer at NerdWallet. Email: [email protected]

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