Popular Buy Now, Pay Later firm Klarna reported continued losses for the quarter that ended in March, despite an expanding user base and growing revenues. The company attributes much of the losses to one-off expenses, such as corporate restructuring.
Users of BNPL services have reported problems, too. Some 4 in 10 say they paid late on at least one of them in the past year, according to a recent survey from LendingTree.
Still, these services are becoming more and more prevalent of late, with BNPL firm Affirm inking an exclusive deal with Walmart and Klarna partnering with DoorDash, the latter prompting a spate of memes about U.S. consumers financing their burritos.
The services have their share of skeptics in the financial community.
“Buy now, pay later programs are a scam,” Douglas Boneparth, a certified financial planner and founder of Bone Fide Wealth, recently posted on LinkedIn. “They encourage overspending, destroy credit, saddle you in debt, and target consumers who are most susceptible to borrowing when they shouldn’t. Society would be better off without them.”
‘Credit is a tool’
The truth is, Boneparth acknowledges, in the right hands, BNPL services can be useful.
“I’m being a little tongue-in-cheek in the post,” he says. “I think the overall principle here is that credit is a tool. If you’re using credit with discipline and knowledge and understanding and control around your financial situation, it can be an incredibly effective tool.”
Credit is precisely what BNPL firms offer. When you go to make a $1,000 purchase, a BNPL firm may give you the option to make four $250 payments over the course of six weeks. While that may feel like the old infomercial model — four easy payments! — after your initial payment you’re effectively taking out a $750 loan you have to pay back in installments.
Fail to pay on time, and you’ll owe a late fee at the very least and, in some cases, interest.
“The biggest point I would make is that Buy Now, Pay Later is still debt,” says Ted Rossman, senior industry analyst at Bankrate.
That’s not necessarily a bad thing. If used responsibly, debt can be a powerful tool for consumers. Pay off your credit cards each month, and you’ll likely earn points or cash back while avoiding interest charges. And if you plan to ever own a home, you’re likely going to have to take out a mortgage to do it.
The problem with BNPL services, says Boneparth, is that they don’t feel like debt. And if people use them routinely to fund purchases they couldn’t otherwise afford, they could wind up in financial hot water, he says.
“Putting a tool like this out there and making it this accessible and as frictionless to use is what’s dangerous,” he says.
Klarna, whose earnings news prompted Boneparth’s original post, sees its service as an easy-to-use, low-cost alternative to other types of consumer debt.
“Klarna believes people should pay with money they have — but when credit makes sense, it should be fair, transparent, and easy to manage,” a Klarna spokesperson said via email. “While credit card interest rates are soaring to record highs of up to 30% in the U.S., Klarna lets shoppers spread the cost of purchases into manageable, interest-free installments, offering a smarter, more responsible alternative to traditional credit.”
How consumers can protect themselves
In their original incarnation, BNPL services were arguably more straightforward than credit cards. You made a purchase for a set amount while giving yourself a clear schedule as to when you could pay back what amounted to an interest-free loan.
But the four payments over six weeks model has since evolved. Many firms offer BNPL plans that span the course of months or years, says Rossman.
“A lot of those do charge interest similar to a credit card — 15%, 20%, I’ve seen some all the way up to 36%,” he says. “So consumers have to look at the fine print. You have to evaluate what you’re being offered, what’s the term, what’s the interest rate.”
Even if you get an interest-free BNPL loan, you’ll still owe late fees should you fail to make on-time payments. And while these missed payments typically won’t affect your credit, says Rossman, you run the risk of letting the convenience of these services get the better of you.
“It’s really important to consider the total cost of ownership, not just the installments,” says Rossman. “Sometimes people are prone to impulse buying, and they end up getting overextended because they didn’t think about that total cost.”
The best way to protect yourself is to avoid buying anything via BNPL that you couldn’t afford, in cash, if push came to shove, Rossman says. Ideally, these tools could be used by savvy consumers to give themselves a little more liquidity while buying big-ticket items within their budget.
Even if you could afford a new refrigerator, by spreading out the payments you give yourself access to a little more cash over the term of the loan, for example.
But if you know you’re susceptible to overspending, stay away, says Boneparth. “If you don’t have the control, you’re playing with fire.”
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