Buy now and pay later? Beware of this dangerous trend
If you’re short on funds, you may sometimes end up choosing a Buy Now, Pay Later (BNPL) plan. It’s undoubtedly convenient. You don’t need a high credit score to use it, and it’s a popular payment option. If you shop online, there’s a good chance the seller uses BNPL.
These plans may make it easier to buy what you want, but that’s not necessarily a good thing. And the availability of BNPL has also led to a dangerous trend of loan accumulation.
What is loan brokerage?
Loan stacking is taking out multiple loans within a short period of time. It can refer to any type of loan. However, these loans are most common with BNPLs because they are generally easy to obtain and are not reported on your credit history. You can get loans from several BNPL services without knowing anything about each other.
For example, let’s say you order $200 worth of clothes online using a BNPL plan. A week later, you want to buy a birthday present for your friend and have spent $300 through another BNPL service. Then you have to buy a new $500 tablet, so you pay for it the same way.
If you had paid for all your purchases up front, it would have cost you $1,000. BNPL plans typically require 25% to be paid upfront. So instead of $1,000, you end up accumulating a loan. You pay $250 upfront and owe $750.
Risks of BNPL and loan brokerage
A single BNPL scheme itself is not a significant risk. Since you have to make payments, you will be tying up money that could have been used in savings or paying bills. However, if you can make the payment, there is no problem.
The real risk is that you develop a habit of using BNPL for purchases you cannot afford. This is a common problem. People typically don’t use BNPL just once. A report from the Federal Reserve Bank of New York found that most consumers who have tried BNPL have used it multiple times.
Among economically vulnerable consumers who have experienced BNPL, 89% have used it several times in the past 12 months. More than a quarter (27%) said they used it 10 or more times.
BNPL offers instant gratification. You can get the items you want without having to wait until you save enough money. And every time you buy with BNPL, it becomes easier to justify buying again. The more you use it, the more money you end up tying up to pay for your purchases. If you take out too many BNPL loans, you may have trouble paying your bills.
We recommend avoiding BNPL
Instead of buying with BNPL and paying for it over time, try the opposite. Set aside money in a savings account each month to purchase the items you want. Once you have enough, buy it. It may not be as exciting as getting what you want right away, but it’s a good financial habit. If you’re having trouble finding money to save, try using a budgeting app to figure out where you can cut back on your spending.
Over time, your financial habits make a big difference in how much you can save and how well you use your money. It is important to develop good habits and try to avoid bad ones. Using BNPL sometimes may not seem like a big deal, but it can be one of those bad habits that makes it difficult to achieve your long-term goals.
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