Should You Use Buy Now, Pay Later for Holiday Shopping?

Buy now, pay later (BNPL) services cater to those who want to make a purchase but don't have the money in their bank account to cover the entire cost. That's where the "pay later" comes in. Among those companies offering some form of BNPL are PayPal ("Pay in 4"), Afterpay, Affirm, and Klarna.

While BNPL might make sense in an emergency situation, there are a number of issues to consider if you're borrowing the money to make everyday purchases, or even just to cover your holiday shopping. Here, we'll walk you through those considerations and whether or not it's a good idea to use BNPL plans to cover your holiday gift purchases.

Potential fees

BNPLs allow you to make purchases and pay them off over time, typically within six weeks. You may be required to make weekly, bi-weekly, or monthly installments until your purchase is paid in full. When you choose to pay using a BNPL plan, you can usually avoid paying loan fees by paying your balance off on schedule.

However, if an issue arises and you make a late payment or fail to pay the entire balance off by the due date, you'll be charged a late fee, interest, or both.

Interest rates can be nasty

Not to put too fine a point on it, but if you miss a payment or pay late, you may get hit with interest charges. And if you think credit card rates are high, BNPL interest rates can be much worse.

Anything you can do to avoid interest means more money to pay (not-so-fun) stuff like car payments and auto insurance.

It won't help your credit score

Let's say you take out a traditional personal loan. Each month, the lender makes a report to at least one major credit reporting agency. If your payment was made on time, it enhances your credit score. The same is not true of BNPL. Credit reporting agencies won't have any idea if you make payments as agreed.

However, if you miss a payment and your account is turned over to a collection agency, that will be reported to the agencies, dragging down your credit score.

Loans are small

BNPL services take a risk by lending money. If you stop paying, there's nothing for them to repossess, and a good chance they will never recover their money. For that reason, most set their credit limits quite low. Let's say you buy a pair of shoes for a grandchild for Christmas priced at $160. According to the BNPL service you use, you must put $40 down and pay the remaining $120 off in six weeks. Just as you must decide if a purchase is a "want" or a "need," you must decide if borrowing $120 is worth the risk of a high interest rate or a hit to your credit score.

There are pros too

You'll notice that, so far, we've only covered the downside of BNPL loans. Here are some of the positives of borrowing this way:

• Your credit score won't get dinged by opting to pay this way because BNPL services don't perform a hard credit check when you open an account.
• BNPL deals are fast and easy. Often, you simply click on a link as you're checking out. There's no separate application and no need to wait for a lender's approval.
• There's an interest-free period. As long as you make payments on time, you won't have to pay loan fees or interest charges.
• If you're using a digital wallet to pay, BNPL can be used offline, meaning you don't have to be shopping online to use it.

Should you use BNPL for holiday shopping?

The truth is that BNPL can be a lifeline, but only if you never have to pay fees or interest. Let's say you have gifts to pick up this holiday season, but your property taxes, HOA fees, or some other annual bill is also due in December. In short, cash is scarce this month.

BNPL may be the solution. As long as you can make the initial payment and your budget shows that you can easily make the remaining payments as they come due, BNPL is like borrowing money for free. It won't build your credit score, but will allow you to buy gifts without pulling out a credit card.

Here's the tricky bit: Only you have access to your monthly budget, and only you know if making payments is likely to be a problem. If there's any question about this, you'll want to steer away from BNPL.

One of the most challenging things about adulting is how often we must ask ourselves the hard questions. For example, what will you do if you're short on money when a BNPL payment comes due? Is there a plan in place? Do you have an emergency savings account to draw from or another way to come up with the funds?

There's also the question of whether a purchase is a want or a need. That one is never fun, especially when you're weighing the necessity of holiday gifts for your loved ones, but it can mean the difference between spending money you don't have and building a solid financial future.

What's so compelling about BNPL is its potential. As designed, it has the potential to make your life easier -- as long as you can make payments on time. So before making your next purchase, do a quick review of your budget to ensure you can easily make the payments.