Buy Now, Pay Later? Does It Make Sense? From the LA Times.

Ask yourself 5 questions before buy-now-pay-later holiday purchases-By Jackie Veling

Shoppers gearing up for the 2023 holiday season won’t have to look hard for a convenient way to pay for all those presents.

“ Buy now, pay later ,” a type of payment plan that divides the total cost of your purchase into smaller installments, is offered at most major retailers, including Walmart, Target and Amazon. It’s expected to fuel $17 billion in online holiday spending this year — up almost 17% from 2022 — according to forecast data from Adobe Analytics.

The short application, immediate approval decision and no hard credit check can make buy now, pay later seem like a no-brainer financing option, but experts say it’s risky. Ask yourself these five questions before opting in.

Does plan charge interest?

Most shoppers will encounter zero-interest pay-in-four plans, which divide the cost of your purchase into four equal installments with the first due at checkout, and the remaining three due every two weeks. But longer, interest-charging payment plans are becoming more common.

These plans range from months to years and charge an annual percentage rate of up to 36%, depending on the provider.

You’ll want to avoid interest since it adds to the cost of your holiday purchases. But even if you get a zero-interest offer, make sure you can cover the installments, said Vaishali Shah, a certified financial planner in Winston-Salem, N.C.

“With a 0% interest rate, it seems like no risk,” she said. “But I want consumers to know they’re still obligating themselves to these payments.”

What are the fees?

Although some buy-now-pay-later providers promise zero fees, many charge late fees. Typically, they are around $7 or $8 per missed payment.

Providers may also charge installment fees, account reactivation fees, card payment fees, payment rescheduling fees or service fees. These fees range from $1 to $15.

If the buy-now-pay-later provider withdraws a payment that causes an overdraft of your bank account, your bank may charge a fee.

Do you have a payoff plan?

Overextension — or taking on more debt than you can afford — is one of the biggest risks of using buy now, pay later, partly because of the delayed payment structure.

For example, a $100 purchase becomes $25 at checkout with a no-interest, pay-in-four plan. This can lead shoppers to buy more or make a habit of splitting up purchases.

Todd Christensen, an accredited financial counselor in Idaho, said he often sees clients opt in to multiple, small-dollar buy-now-pay-later loans without realizing how the payments add up.

“It’s the trend of shopping by monthly payment rather than price,” Christensen said. “So we make a little payment here, a little payment there, and then pretty soon every dollar of our income — and then some — is spoken for.”

Will you need to return it?

If there’s a chance you’ll need to return a holiday gift, it may be best to avoid buy now, pay later altogether.

Buy-now-pay-later returns can be tricky because they need to go through two parties: the store you bought the product from and the buy-now-pay-later provider that financed it.

If there’s a dispute about a return, your refund may be delayed, and some shoppers may have to keep making payments until the dispute is resolved, according to a September 2022 report from the Consumer Financial Protection Bureau.
Can you pay with cash?

Both Shah and Christensen urge consumers to save for holiday shopping, starting now.

Shah has her clients create a “mini-budget” during the holidays. List everyone you need to buy gifts for and the amount you’re comfortable spending. Once you have the total, start socking away the funds, ideally in a high-yield savings account, weeks before you begin shopping.
Veling writes for personal finance site NerdWallet. This article was distributed by the Associated Press.