Apple offers Buy Now, Pay Later. 4 reasons to think twice before signing up

From the archive (May 2021): The buy now, pay later wave: Afterpay, Klarna, Affirm and competitors hope to take the US by storm

BNPL companies have partnerships with an ever-growing number of retailers – from American Airlines
EEL,
-4.21%
to rite aid
WHEEL,
-5.65%
– which significantly expands the number of stores where a consumer opts for a pay later service. The companies make money by charging these merchants a fee with every purchase.

BNPL is already a hot topic and is likely to see a surge in interest with the entry of a tech giant like Apple. analysts say. Apple’s BNPL product is operated by Mastercard MA,
-3.68%
network and is intended to be available wherever Apple Pay is a payment option. Payments can be managed on the iPhone itself via Apple Wallet.

Apple did not immediately respond to a MarketWatch request for comment on its BNPL program.

Before Apple’s announcement, more than 10% of the Fed in 2021 said they had used a BNPL service in the past year; 78% did so for convenience and 53% did so to avoid using a credit card. Worryingly, about half said it was the “only way they could afford their purchase.” BNPL was more common among people with lower incomes and less education, the Fed detailed in its 2021 report.

Here are four reasons why experts say buyers should exercise caution before signing up for a BNPL program.

1. Interest-free installments do not mean that a buy-now-buy-later option is cheaper.

If you split a payment into four parts and make an expensive item “cheaper” and more manageable by paying in installments, there is a potential risk of overspending.

Consumers using BNPL “need to really look at the total cost of ownership,” Ted Rossman, senior industry analyst at CreditCards.com, told MarketWatch. “Don’t just fall into that trap: ‘Oh, it’s only four payments in six weeks – it’s not that bad.’ What is the real amount you owe? Are you mixing this with other buy now, pay later plans?”

“You just have to be careful not to overspend because $50 here and $50 there can really add up,” Rossman added. “There is a risk of overspending.”

2. Buying now and paying for essentials later could be a sign of financial distress.

There’s also the possibility of unnecessarily deferring payments, especially for essential items, which could become a band-aid to mask deeper financial problems.

For example, as BNPL operators, they work with companies that supply essential goods – from gas stations to Super Market — People can consider paying for such services in installments.

“There’s going to be a big market for things like gas and groceries,” Rossman said, and “that worries me. It’s a bit like robbing Peter to pay Paul.”

Especially in this inflationary environment of high gas and food prices, there is a temptation to use BNPL to defer costs.

But when a BNPL user spreads payments over six weeks, Rossman said, “In six weeks you’re going to need more gas… that’s like being upside down.”

3. BNPL could may affect your creditworthiness in the future.

Missing a BNPL payment cannot incur the same penalties as missing a credit card payment. Late fees are not essential as of now. However, as credit bureaus are looking into BNPL and considering how to factor it into users’ credit scores, there is a chance that your credit score will be damaged in the near future.

It hasn’t happened yet though TransUnion
TRUE,
-1.75%,
Equifax
EFX,
-2.15%,
and experiential
EXPGY,
-2.78%
are all watching the “buy-now-pa-later” space to understand how it works and how to integrate it with mainstream credit scores, their sites say.

The Fed’s survey found that most people using BNPL make payments on time. However, late payments were more common among those earning less than $50,000 per year and among those who reported having lower credit scores.

So signing up for this BNPL service on your iPhone can potentially hurt your credit score if you miss enough payments.

4. The good times might not last forever for BNPL users.

Finally, there is a risk of BNPL firms changing course, as offering zero-cost installment loans against an inflationary backdrop could become costly – and therefore short-lived.

As the world emerges from the darkest days of COVID-19, there is a possibility that the Federal Reserve will raise interest rates even more than it has already done to control rising US inflation

Rising interest rates have already had an impact on the real estate market and credit cards. If BNPL providers continued to offer free installment loans, consumers could potentially turn to them for larger and riskier purchases that they might not end up paying back in full.

Consider this: Approximately 3.7% of outstanding loan dollars at BNPL operator Affirm AFRM,
-9.22%
were already at least 30 days overdue at the end of March, which corresponds to an increase of 1.4% in the previous year The Wall Street Journal reports.

Losses, partly related to late payments, rose for Affirm and also for Zip, another BNPL player, the Journal reported.

Affirm said the increase in late payments is related to looser underwriting standards; Zip said some of its losses were related to “companies it acquired in 2021,” the Journal reported.