It’s tempting to use buy now, pay later plans (BNPL) to take advantage of holiday deals and discounts. BNPL plans offer short-term, sometimes interest-free, credit options for buying clothes, electronics, furniture and appliances through payment platforms like Klarna, Affirm and Afterpay.
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According to data from the Federal Reserve Bank of Boston, the use of BNPL plans rose from 6.6% in 2021 to 9.3% in 2023, as consumers relied more on online shopping during the pandemic. However, these plans can lead to overspending because they make the cost of items seem more affordable when broken down into smaller monthly payments.
Here are ways to use BNPL plans during the holidays without falling into debt.
Assess Your Current Debt Load
First, list your bills, debt payments and current BNPL payments so that you can get a snapshot of all your purchases in one place.
“Otherwise, it’s easy to lose track of how much you’re spending each month when your payments are spread over several different cards or BNPL payments,” said Andrea Woroch, a consumer savings and smart shopping expert and author.
Woroch explained, “Taking on too many installment payments though, could bust your monthly spending budget and cause you to take on debt to afford other essential purchases because you’re out of cash.”
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Ensure You Can Afford the Additional Debt
Make sure you can consistently afford the monthly payments before you sign up.
“If you’re already stretched thin, adding a BNPL commitment just isn’t a good idea,” said Joe Camberato, CEO of National Business Capital, a lending platform for companies.
“These payment plans usually require you to pay everything off within four to six months, which can lead to a cycle of missed payments and more debt,” he continued. “You can’t rely on hope to pay it off.”
Beware of Hidden Costs
Some BNPL plans are interest-free. However, you could incur interest if you miss a payment or don’t pay off the balance within the designated period.
“Make sure you know the interest rate, if any, once the promotional period ends, and check for hidden fees like late payment penalties,” Camberato said. “Some BNPL plans look appealing up front, but they can come with costly terms that kick in later.”
According to Aaliyah Kissick, a Gen Z financial expert and CEO of the Financial Literacy Diaries, make sure the interest on a BNPL isn’t greater than the amount on a credit card.
“For example, if your credit card APR is 27%, you should choose the credit card if a BNPL will cost you 30%,” Kissick said. “A credit card probably has cash-back or rewards points that a BNPL doesn’t have. You’ll save more in the long run.”
In addition, Camberato advised researching the impact late payments could have on your credit, as some BNPL platforms report to credit agencies, affecting your credit.
“These payment plans usually require you to pay everything off within 4-6 months, which can lead to a cycle of missed payments and more debt,” Camberato said. “You can’t rely on hope to pay it off.”
Keep a Running Tally
Buy now, pay later offers instant gratification and delayed consequences.
“It’s so easy to get ahead of yourself when you’re not seeing the money come out of your account immediately,” Kissick said. “It’s also really easy to keep yourself within your budget, and it doesn’t require any fancy tools or subscriptions.”
For example, Kissick recommended getting notecards for each person you’re buying for, writing the amount you want to spend on the front, and tallying up everything on the back. “Make sure to include the interest rate and shipping in your costs, too,” she said.
Woroch also recommended checking in with your BNPL bills monthly to make sure you stay on budget and don’t overspend.
“The benefit of using BNPL is that you know exactly what you owe each month and when the total purchase will be paid off since the total purchase is broken into several equal payments,” Woroch said. “Unlike a credit card where you pay what you want or can afford each month as interest piles up.”
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This article originally appeared on GOBankingRates.com: 4 Ways To Use Buy Now, Pay Later Plans During the Holidays Without Falling Into Debt
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