‘Buy Now, Pay Later’ Makes It Easy to Buy Things, Easier to Get into Financial Trouble

Buy now, pay later (BNPL) companies make it easier than ever to get short-term financing to buy all kinds of things, but easier doesn’t necessarily mean better.

BNPL services have risen in popularity in the past few years. Fifteen percent of Americans used BNPL in 2024, up from 14% in 2023 and 12% in 2022, according to the Federal Reserve. Some use these services for luxury goods, but many are using BNPL for essentials like groceries or medical bills.

According to University of Virginia Darden School of Business professor Chuck Howard, whose research includes financial decision-making, the risk of getting into a financial hole using BNPL outweighs the reward of getting stuff sooner most of the time.

The Darden Report caught up with Chuck to learn more about BNPL and the pros and cons of using it.

How does buy now, pay later work, and where does it fit into a personal financial strategy?

BNPL plans let consumers pay for things in installments. For example, you can currently order a $14 burrito on DoorDash, receive it in minutes, then pay for it in just four easy installments of $3.50 per week! What a world.

Of course, you can also buy much more expensive things this way, like clothing, electronics and furniture, which is how most people get into trouble. Typically speaking, you are not charged any interest on a BNPL loan until you miss a payment. And — wait for it — LOTS OF PEOPLE MISS PAYMENTS! This is why BNPL does not fit into most people’s financial strategy. Unless you have perfect self-control and omniscient foresight, you will eventually miss a payment, start paying late fees and end up paying more than you would have if you had just waited to buy the product.

What are the pros and cons of using BNPL?

Pro: In theory, if you are 100% sure you can pay off a purchase on time and you don’t have enough money to pay the total purchase price right away, then you can use BNPL to get something a little sooner than you would have otherwise.

For example, imagine you want to buy a $1,000 TV but you only have $500 in the bank. If you are 100% certain you are getting a $500 paycheck next week and you are 100% certain you have no other expenses coming up, you can use BNPL to buy your TV today rather than waiting until you get paid. Unfortunately, most people overpredict their future income and underpredict their future expenses, so almost no one in this situation can be 100% certain they’ll be able to pay off the purchase on time.

Pro: In theory, if you are 100% certain you can pay off the purchase on time and you do have enough money to pay the total purchase price right away, then using BNPL lets you invest the difference and potentially earn some interest on that investment.

For example, if you want to buy a $1,000 TV and you have $1,000 in the bank, using BNPL means you can pay only $250 today and invest the rest, pulling out the additional $250 weekly payments as you need them. However, this strategy only works if (a) you invest the money profitably, which is almost impossible to do consistently on such a short time horizon, and (b) the transaction costs on your investment are lower than your profits, which is also almost impossible on such a short time horizon.

My advice? Wait until you have $2,000 in the bank then think about the new TV.

Pro: OK, so in theory, if you are literally starving, then BNPL might seem like a good way to get groceries. But it’s probably not. If you use BNPL to get groceries today and you can’t pay the loan back on time, that is going to make it even harder for you to get groceries in the future because you’ll be in debt to the BNPL company.

My advice? If you are in this situation, look for a local foodbank, church or charity and ask for help.

Con: A debt cycle that can be very hard to escape.

What is your advice for how to use BNPL?

My advice is to avoid it altogether. Instead, set a conservative budget, track your spending against your budget so that you only spend money on what you actually need, pay off any debt you might already have, and once you’re debt free, invest your savings in a market index fund.

Mathematically speaking, financial success is not complicated. Just follow these steps and one day you will look back and laugh at the thought of ever needing to use BNPL. However, psychologically speaking, it is really, really hard to control our impulsive spending and stay on budget, especially when we’re young.

So, how do we conquer the psychological challenges that stand in the way of our financial success?

My first tip is to focus on the long-term happiness that financial security can give you rather than on the “stuff” that might give you momentary happiness today.

My second tip is to remember that BNPL companies only win when you lose. (They only make money when people fail to make payments on time.) So, when you are considering whether to use BNPL, keeping that in mind might motivate you to avoid it.

What happens if someone uses BNPL and then misses payments?

First, you pay a late fee, which is either a flat fee like five bucks per missed payment or a percentage of the balance you owe. I don’t know for sure, but my guess is that flat fees are more common for small purchases (e.g., if you miss your $3.50 burrito payment you might have to pay $5) and percentage payments are more common for large purchases (e.g., if you miss your $250 weekly TV payment you might have to pay 10% or $25).

Second, you may be blocked from using the service until you’re paid up.

Third, your credit will likely suffer, especially if you’re missing large payments.

Fourth, there can be hidden fees, like when a BNPL company tries to deduct an autopayment from an account with insufficient funds, and the bank hits you with an NSF charge.

How does having BNPL payments affect one’s ability to budget for essentials like rent or groceries?

The number one way to stay on budget is tracking your expenses. Having multiple BNPL payments makes tracking your expenses more difficult, because they all have different amounts, deadlines, penalties and so on, which makes it harder to stay on budget.

What are the signs BNPL is damaging one’s finances?

There is only one sign that BNPL is damaging someone’s finances: they are spending more by using BNPL than they would have otherwise.

If you are relatively well off, this means you are either saving less money than you would have otherwise, or you are consuming less than you would have otherwise (because every dollar you pay in interest or late fees is a dollar you can’t spend on something else you want).

If you are not relatively well off, then you are going to end up in a debt cycle that can be hard to escape. The solutions to this problem are reducing spending, increasing income or some combination of the two, then using the “extra” money to pay off your debt as quickly as possible.

I also recommend taking some time to reflect on why you used BNPL in the first place (it’s usually some combination of convenience, impatience and a lack of money), then use those observations to learn about how you can avoid similar circumstances in the future. Because guess what? If you are a young person reading this, the credit companies are coming for you next.