Tips to help manage your buy now, pay later loans

NEW YORK (AP) — Between rising prices and dwindling job growth, using “buy now, pay later” on everything from concert tickets to fast food deliveries is becoming increasingly appealing. But greater use could also mean greater trouble, as more people fall behind on repaying these loans.

Buy now, pay later loans gained popularity during the pandemic, especially among young people. While these loans can help you make large purchases without paying interest or undergoing a hard inquiry in your credit report, they can also easily be overused.

About 4 in 10 Americans under the age of 45 say they’ve used "buy now, pay later″ services when spending on entertainment or restaurant meals, or when paying for essentials like groceries or medical care, according to a poll from The Associated Press-NORC Center for Public Affairs Research.

Buy now, pay later loans were not previously reported to the three major credit reporting bureaus. But consumers will soon see the impact of buy now, pay later loans on their FICO credit scores.

Whether you’re a first-time or recurring user of buy now, pay later plans, here are some expert recommendations to use this tool responsibly.

Buy now, pay later plans divide purchases in monthly installments, typically in four payments. These loans are marketed as having low or no interest. Klarna, Afterpay, PayPal and Affirm are among the most popular buy now, pay later companies.

These loans should ideally be used for large purchases or necessities, said Lauren Bringle, Accredited Financial Counselor at Self Financial.

Bringle recommends asking yourself these questions before purchasing: Can I survive without this purchase right now? Do I need it for work, school, or a basic household need?

Buy now, pay later is best used when you have a plan for the purchase, not for impulse buys. For example, when you need to buy a computer for school or a new refrigerator for your house, recommended Tyler Horn, head of planning at Origin, a budgeting app.

Before deciding to take out a buy now, pay later loan, it’s a good idea to pause and consider if it’s the best financial decision for you, recommended Erika Rasure, Chief Financial Wellness advisor for Beyond Finance.

Buy now, pay later plans can be positive budgeting tools when used strategically. However, it’s essential you know your spending behaviors before using them, said Rasure. If you’re an emotional spender, it might be hard for you to moderate your use of this tool and you could end up adding to your financial stress.

“Buy now, pay later can become a coping mechanism rather than a financial tool that can get you a good deal or improve your cash flow,” said Rasure.

If you have other payments due, such as credit card or student loan payments, consider how a buy now, pay later loan will add to your monthly payments, recommended Sarah Rathner, Senior Writer for NerdWallet.

Like credit cards, each buy now, pay later loan has terms and conditions that can vary by purchase and providers. It’s crucial that you know what you’re agreeing to before you sign up, recommended Michael Savino, Chief Lending Officer at Municipal Credit Union.

“Always read the fine print. Understand fees, repayment schedules, and what happens if you miss a payment or go into default,” said Savino.

In general, if you miss a buy now, pay later payment, you can face fees, interest, or the possibility of being banned from using the services in the future.

You can easily run into difficulty keeping up with the cost and schedule of your repayments if you're trying to simultaneously pay off two, three or more loans, Savino said.

“Juggling multiple plans creates a blind spot and overall debt load, and multiple repayment dates are hard to manage,” Savino said. "So more loans makes it more difficult to budget.”

The best approach: Stay mindful of your overall spending, and limit the number of buy now, pay later loans.

Whether or not you're paying for multiple buy now, pay later purchases at once, you want to be aware of where your money is going at any given time, recommended Courtney Alev, consumer advocate at Credit Karma.

“Buy now, pay later often requires automatic payments, so you want to make sure that your account is funded so that those payments are processing successfully,” recommended Jennifer Seitz, director of education at Greenlight, a financial literacy app for families.

There are many ways to track your loan payments — from setting a reminder on your calendar, to creating an intricate excel spreadsheet or tracking them on an app, said Jesse Mecham, founder of the budgeting app YNAB.

Finding the best method that works for you will help you stay on track and avoid late fees.

For shoppers with low credit scores or no credit history, buy now, pay later loans can seem like the best, if not the only, loan option. If used moderately and responsibly, these short-term loans can be a positive lending exercise, said Savino.

“It allows you to to establish a baseline (and) get access to other affordable credit options that you can leverage that will ultimately provide financial wellness,” he added.

Still, NerdWallet's Rathner emphasized that shoppers using these tools always remember that buy now, pay later is a form of borrowing money.

“It just kind of feels like you’re given a little extra time to pay back," Rathner said. "But the reality is, if you miss payments, it can hurt your credit, much like missing payments with any other loan.”

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The Associated Press receives support from Charles Schwab Foundation for educational and explanatory reporting to improve financial literacy. The independent foundation is separate from Charles Schwab and Co. Inc. The AP is solely responsible for its journalism.