Buy Now, Pay Later (BNPL) for Holiday Shopping: Risks & Rewards

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Buy now, pay later plans are growing in popularity. Are they a smart choice?

The concept of buying something and paying for it over time certainly isn't new. Consumers commonly use credit cards to purchase items and pay them off when they can.

The problem with credit cards, though, is that carrying a balance automatically means having to pay interest on the items you buy. Plus, too high of a credit card balance could damage your credit score, even if you make your minimum monthly payments on time.

It's for this reason that more consumers are starting to favor buy now, pay later plans, or BNPL plans for short. These plans let you purchase items and pay them off in installments without accruing interest.

According to a survey from BNPL provider Affirm, 56% of Americans say they're interested in using a pay-over-time solution like BNPL to cover their holiday gifts. But is that a good idea?

The dangers of BNPL

BNPL plans can be extremely useful in helping consumers manage their cash flow, especially around the holidays when they're doing a lot of spending. In fact, paying for purchases using a BNPL plan can be a smart idea if you're confident you'll be able to keep up your payments under the agreement you sign.

Say you're about to start your holiday shopping and have little money to work with, but you know that at the end of the year, there's a sweet $2,000 bonus coming your way from your employer. If you make $600 in holiday purchases using a BNPL plan, you may have no trouble sticking to your agreement once that windfall hits your bank account.

Even better, opting for BNPL over a credit card could save you a month's worth of interest or so. And while that interest may be minimal, it's not worth having to pay if there's a way to avoid it.

But while BNPL plans have their advantages, they can backfire. A credit check generally isn't required to sign up for a BNPL plan, so you may be tempted to buy things for the holidays that you can't afford.

Then, if you can't keep up with your payments, a couple of things will happen. First, you'll face credit score damage, the same way you would by being late with a credit card payment. Second, you'll be charged interest and fees on the purchases you made with your BNPL plan, thereby negating that benefit.

Should you use a BNPL plan this holiday season?

A BNPL plan could give you more financial breathing room during the holidays. If you're confident you can manage your payments under one of these plans, then it could be a good idea. But before you sign up for one, do two things.

First, set up a spending budget so you know what payments you can afford. Next, make a list of the items you're looking to buy. That way, you'll be less likely to use a BNPL plan for an impulse purchase that wrecks your budget.

BNPL plans may help get a lot of shoppers through the upcoming holiday season. Just proceed with caution if you intend to use one.

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