4 in 10 Consumers Plan to Use 'Buy Now, Pay Later' for Holiday Purchases. Should You?

These plans may be convenient, but proceed with caution.

At this point, you may already be making plans to start your holiday shopping -- if you haven't done so already. Many retailers are releasing deals early this year, so it pays to start looking around and seeing what discounts are available.

You may be tempted to purchase items you can't pay for right away. In that scenario, you have choices. You could charge your purchases on a credit card and pay your balance off over time. Or, you could use a "buy now, pay later" plan, or BNPL plan, which allows you to pay off purchases in installments over what's usually a three-month period or less.

In a recent Bluedot survey, a good 40% of respondents said they plan to use a BNPL plan to cover holiday purchases. But is that a smart idea?

The upside of BNPL plans

When you charge expenses on a credit card, you automatically sign up to pay interest on the balance you carry forward. BNPL plans don't work that way. If you stick to your plan's payment schedule, you won't incur interest charges. And that could amount to a lot of savings.

BNPL plans are also fairly seamless. Generally, you apply on the spot and, if approved, make an initial payment and get the option to pay off the bulk of your purchase in installments. 

The downside of BNPL plans

BNPL plans are a reasonable alternative to credit cards. But they also have their drawbacks. 

For one thing, you only get a limited window of time to pay off your purchases. 

With a credit card, you could carry a balance forward for eight months, 10 months, one year, or longer. With a BNPL plan, you generally have to pay off your purchase within three months. And while it's easy to argue that being able to carry a credit card balance forward indefinitely is not, in fact, a good thing, the reality is that credit cards can be more flexible.

Also, while you won't incur interest charges on a BNPL plan if you stick to it, once you stray from your plan's payment schedule, major consequences can arise. Not only might you incur costly interest charges and fees for being late with payments, but that activity could also get reported to the major credit bureaus, the same way you're commonly reported for being late on a credit card payment. The result? Major credit score damage that could make it difficult to borrow affordably in the future. 

What's the right call?

Paying for holiday purchases with a BNPL plan makes sense if you know you can afford the payments involved, and also, if you're certain you have a pile of cash coming your way in the near term. Let's say you've already been told to expect a $1,000 year-end bonus on Dec. 1. If you're trying to get a jump start on your holiday shopping, it may be reasonable to sign up for a BNPL plan in November and use your bonus to cover your payments.

On the other hand, if you're not sure you understand the terms of the BNPL plan you're looking at, don't sign up. And definitely don't sign up if money is tight and you're barely able to cover your basic bills.

A BNPL plan is not a free pass to walk away with the items you want without having to worry about paying for them. And it's important you know that before considering one.