Avoid the Risks of Having Multiple Loans Buy Now, Pay Later | Smart Change: Personal Finances
“Buy Now, Pay Later” promises simple payment plans that can make financing your next purchase easy and affordable.
These plans typically split your total purchase into four equal, interest-free installments. The first installment is due at the cash desk and the other three are due every two weeks until the loan is repaid in full.
But even a simple payment plan can get messy when juggling three or four of them at once – a problem unique to buy now, pay laterwhich, unlike other forms of financing, does not consider similar existing debts when extending an offer.
Know the risks of multiple purchases now, pay off loans later
Although some debts like credit cards and traditional loans are reported to the three major credit bureaus, buy now, pay later loans generally aren’t, so lenders don’t know how many loans you have. course and cannot assess your ability to pay. Continued.
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This will likely change in the coming months as TransUnion, Equifax and Experian work to increase visibility of buy-now, pay-later on credit reports to better track loans between lenders, while protecting credit ratings of consumers likely to take out multiple loans in a short period of time and repay them successfully.
For now, borrowers can continue to borrow from several buy now, pay later. And while plans may be advertised as free, the consequences of delay are anything but, says Marisabel Torres, California policy director for the Center for Responsible Lending, a nonprofit research and policy organization.
“We need more transparency,” she says. “It’s not just, ‘zero funding, zero fees.’ If you miss a payment, you will incur a fee.You will incur some type of penalty.
While many buy now, pay later, providers charge late fees, which can push borrowers further into debt, others send delinquent loans to collections, jeopardizing borrowers’ credit scores .
There are also consequences on the other side of the transaction. While a buy now, pay later provider doesn’t penalize you for being late, your bank might if you overdraw an account tied to the loan, such as a debit card.
“Could you trigger an NSF charge or an overdraft fee? Could you be kicked out of the banking system? These are very real consequences of not being able to keep up with a loan payment,” Torres says.
Set a budget to buy now, pay later
For borrowers who buy multiple now and pay off loans later, the most important thing to do is plan your spending ahead of time, says Jordan Nietzel, a certified financial planner based in Columbia, Mo.
If you are not already following a Monthly Budgetstart by looking at your income and expenses over the past three months to determine how much money you have been coming in and going out.
Assuming there is excess income that you want to spend on buying now, pay for purchases later, set a total dollar limit for what you can commit to paying monthly, instead of evaluating offers of individually ready.
Nietzel says it’s especially important to consider buy now, pay off loans as a whole, because small installments make debt feel more manageable than it is.
“We tend to think, ‘Well, that’s okay, I can definitely make that $10 a month payment,'” he says. “You don’t realize that if you do this multiple times, those payments pile on top of each other.”
Resist the temptation to overspend
Budgeting can also help address one of the main concerns about buy now, pay later: the ease of overspending at checkout.
Since the buy-it-now and pay-later plans automatically split your purchase, it’s easy to lose track of what you originally planned to spend. For example, a purchase of $100 becomes $25 with a four-payment plan. For some shoppers, that might mean filling their shopping carts with more items.
Paul Paradis, president of Sezzle, a buy-it-now, pay-later provider that partners with Target and other retailers, says his company has little to gain from encouraging customers to go the extra mile.
“Since we don’t charge interest and derive the vast majority of our revenue from our merchant fees, we actually lose if we encourage overspending,” he says. “Unlike credit cards which make money when people don’t pay on time, we lose money when people don’t pay us back on time.”
However, Nietzel and Torres note that large retailers’ willingness to pay merchant fees first likely means consumers are spending more.
If buy now, pay later plans entice you to spend regularly, you better ditch them.
“It may seem easier on your cash flow, but in the long run, you pay the same amount,” says Nietzel. “So if that forces you to buy more than you otherwise would have, that’s where it really becomes a problem.”
This article was written by NerdWallet and was originally published by The Associated Press.