Five questions to ask before using buy now, pay later offers

Shoppers gearing up for the holiday season won’t have to look hard for a convenient way to pay for their gifts.

Buy now, pay later, a payment plan that divides the total cost of your purchase into smaller instalments, is offered at most major retailers.

It's expected to contribute $17 billion in online holiday spending this year – up about 17 per cent from 2022 – according to forecast data from Adobe Analytics, a measurement tool from software company Adobe.

The short application, immediate approval decision and no hard credit check can make buy now, pay later seem like an easy financing option, but experts say it’s risky.

Ask yourself these five questions before opting in:

1. Does this plan charge interest?

While most shoppers will encounter zero-interest pay-in-four plans – which divide the cost of your purchase into four equal instalments with the first due at checkout, and the remaining three due every two weeks – longer, interest-bearing payment plans are becoming more common.

These plans range from months to years and charge an annual percentage rate of up to 36 per cent, depending on the provider.

You’ll want to avoid interest as it adds to the cost of your holiday purchases. But even if you get a zero-interest offer, make sure you can cover the instalments, says Vaishali Shah, a certified financial planner in North Carolina.

“With a zero per cent interest rate, it seems like no risk,” she says. “But I want consumers to know they’re still obligating themselves to these payments.”

2. What are the fees?

Although some buy now, pay later providers promise zero fees, many charge late fees, which are typically about $7 or $8 per missed payment.

Providers may also charge instalment fees, account reactivation fees, card payment fees, payment rescheduling fees or service fees. These fees range from $1 to $15.

Read the loan terms carefully and keep in mind that there can be fees attached to the transaction.

If the buy now, pay later provider withdraws a payment that causes you to use your overdraft, your bank may charge a fee.

3. Do you have a plan to pay it off?

Overextension – or taking on more debt than you can afford – is one of the biggest risks of using buy now, pay later, partly because of the delayed payment structure.

For example, a $100 purchase becomes $25 at checkout with a no-interest, pay-in-four plan. This can lead shoppers to buy more or make a habit of splitting up purchases.

Todd Christensen, an accredited financial counsellor in Idaho, says he often sees clients opt for multiple, small-dollar buy now, pay later loans without realising that the payments add up.

“It’s the trend of shopping by monthly payment rather than price,” Mr Christensen says. “So we make a little payment here, a little payment there and then pretty soon every dollar of our income – and then some – is spoken for.”

Take into account your other obligations and know how you’ll cover each instalment before signing up for buy now, pay later.

4. Will you need to make a return?

If there’s a chance you’ll need to return a holiday gift, it may be best to avoid buy now, pay later plans.

Under the payment plan, returns can be tricky as they need to go through two parties: the store you bought the merchandise from and the provider that financed it.

If there’s a dispute about a return, your refund may be delayed, and some shoppers may have to keep making payments until the dispute is resolved, according to a September 2022 report from the US Consumer Financial Protection Bureau.

5. Can you pay with cash?

Ms Shah and Mr Christensen both urge consumers to save for holiday shopping as soon as possible.

Ms Shah has her clients create a “mini-budget” during the holidays. List everyone you need to buy gifts for and the amount you’re comfortable spending.

Once you have the total, start putting away the funds, ideally in a high-yield savings account, in the weeks leading up to your shopping.

If you don’t have extra cash to set aside, Mr Christensen advises rethinking your holiday shopping instead of financing it.

“The reality for most people is that if we can’t afford to buy it now, we can’t afford to buy it generally,” he says.

“We have to start asking ourselves, ‘Is this really my priority?’ You only have a limited amount of money, and it needs to go to the most important things.”