As Black Friday approaches, we wanted to take a moment to talk about “buy now, pay later” (BNPL) services like AfterPay and Klarna and whether they’re designed to trick you into taking on more consumer debt. (Hint: they can if you’re not careful.)

If you’ve spent anytime shopping online, then you’ve seen these BNPL services a million times: Buy a pair of leggings for $128 or “4 payments of $32.00 with Afterpay,” or buy this coffee cup for $35 or “4 payments of $8.75 with Klarna.” You can’t escape it. 

BNPL services tout 0% interest charges when you pay on time, but that doesn’t mean they’re completely harmless. Here’s what you need to know about them as we head full force into Back Friday and the holiday season. 

How “Buy Now, Pay Later” Services Work

The concept of buying now and paying later isn’t new. It’s essentially a virtual version of the traditional layaways you used to find at Sears and Walmart back in the day. 

Here’s how they work. 

You essentially add items to your cart online, then select buy now, pay later at checkout. You fill out a quick approval form, and if accepted, the cost of the purchase is divided out into a payment schedule — usually four equal payments charged to your debit or credit card bi-weekly. All interest free. There’s also no hard pull on your credit; just a soft credit check that doesn’t affect your score. 

Some of the most popular BNPL services include Klarna, Afterpay, Affirm, QuadPay, Sezzle, and PayPal’s Bill Me Later”, among others.

A New Study Suggests BNPL Services Could Do More Harm Than Good

One major criticism of BNPL services is just how quickly you can get approval. It’s nearly instant, which, while convenient, doesn’t give you enough time to determine if you can actually afford the payment or not. In other words, it can feed into impulse purchasing. 

A recent Credit Karma study found that a little over 40% of Americans have used a “buy now, pay later” service — 38% of which have missed a payment at least once. Of those who have missed payments, 72% say it’s resulted in their credit score decreasing. 

Another study by the Motley Fool found that 18 to 24 year olds are the group most likely to suffer from BNPL services, with 47.45% having made a late payment or incurred a late fee.

The CFPB Even Released a Warning About BNPL Services

There was actually an increase in BNPL services during the coronavirus pandemic, which prompted the Consumer Finance Protection Bureau (CFPB) to release an article early this year warning consumers of the risks associated with them. 

Some of these warnings included the fact that: 

• BNPL services don’t charge interest but many charge late fees.
• Your credit score could decrease or your debt could be sent to collections if you stop making payments.
• Your bank could charge you an overdraft fee if you don’t have enough money in your account to cover a scheduled payment.

If You Plan On Using BNPL for Black Friday, Keep These Tips In Mind…

Buy now, pay later services aren’t all bad. If you weigh the pros and cons and decide to use them this Black Friday, here are some tips to keep in mind: 

BNPL Services Don’t Improve Your Credit, but They Could Hurt It if You Miss a Payment

Most BNPL services don’t report on-time payments to credit bureaus, so choosing defer payments won’t boost your credit score at all. That said, some BNPL services do report missed payments if you fail to pay, which could cause your credit score to dip. In other words, they don’t help you score in any way, but they could hurt it if you’re not careful.

You Won’t Pay Interest, But You Could Face Late Fees

Most BNPL services don’t charge interest, but they do charge late fees if you miss a payment. These late fees could range anywhere from up to $7 to up to 25% of your initial order value, according to research conducted by the Motley Fool.

The BNPL service could also send your debt to collections or block you from making future payments if you stop paying altogether. You’ll need to review the specific terms and conditions for the BNPL services you plan on using to know which fees you need to watch out for. 

BNPL Services Don’t Have the Same Protections as Credit Cards

The CFPB warns that BNPL services don’t currently have the same dispute protections as regular credit cards. So, if you end up with a faulty item or you get scammed, you could be on the hook for the full purchase price even if you return the product. 

Long story short, if you’ve never bought something from a particular merchant or seller before, do your research ahead of time to make sure they’re reputable before you initiate a BNPL service. 

Shop Smart This Holiday Season

BNPL services have popped up at a rapid rate over the past few years and can now be found at almost every virtual checkout — from clothing and furniture stores to electronic and exercise equipment shops. 

But just because you can easily qualify for a BNPL service doesn’t mean you should use it. Before you start shopping this holiday season, review your budget to see if you can actually afford the items you want to buy. If you do decide to move forward, make sure you make your payments on time so you don’t rack up late fees or hurt your credit score in the process. 

Happy holidays!

Have you used a “buy now, pay later” service like Klarna or Afterpay before? If so, what was your experience like? Share it with us now on Twitter.