After months of speculation, Apple (AAPL,
) finally unveiled its buy now, pay later offer this week, floundering in an industry that has seen explosive growth. But consumers should be wary of jumping into the service and consider some of the potential pitfalls, observers say.
Buy now, pay later (BNPL) startups offer a simple product (at least on the surface): a consumer who uses the product to make a purchase can split the cost into four smaller installments, which are mostly interest-free, some weeks.
BNPL companies have partnerships with an ever-increasing number of retailers — from American airlines
at Ritual Aid
– which greatly increases the number of stores a user can visit to use the pay later service. Companies make money by charging these merchants a fee on every purchase.
Already a hot commodity, the entry of a tech giant like Apple is likely to trigger a flurry of interest in BNPL, analysts say. Apple’s BNPL product is powered by the Mastercard MA,
network and will be available wherever Apple Pay is available. Payments can be managed on the iPhone itself via Apple Wallet.
Before Apple’s announcement, more than 10% of people surveyed by 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, around half said it was “the only way they could afford their purchase”. BNPL was also more common among lower-income and less-educated people, the Fed detailed.
1. Interest-free installments don’t mean it’s cheaper
By splitting a payment into four and making an expensive item “cheaper” and more manageable by paying in installments, there is a potential risk of overspending.
Consumers using BNPL “need to be very careful about the total cost of ownership,” Ted Rossman, senior industry analyst at CreditCards.com, told MarketWatch. “Don’t just fall into this trap of ‘Oh, it’s only four payments over six weeks – that’s not that bad.’ What is the actual 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. Postponement of payments for essential goods may indicate distress
There is also the potential for unnecessary deferral of payments, especially for essential goods, which could become a band-aid for bigger financial problems.
“There’s going to be a big market for things like gas and groceries,” Rossman said, and “it worries me, it’s kind of like robbing Peter to pay Paul.”
Particularly in this inflationary environment, with high gas and grocery prices, it is tempting to use BNPL to defer costs.
But if a BNPL user spreads out their payments over six weeks, “I’m worried if you can’t afford the gas now,” Rossman said, because “in six weeks you’ll need more gas. .. it’s just kind of like you’re upside down.
3. Potential impact on credit score
The absence of a BNPL payment may not result in the same penalties as the absence of a credit card payment.
Late fees are not substantial, as of now. But with credit bureaus reviewing BNPL and considering how to factor them into users’ credit scores, there is a possibility of damage to your credit rating in the near future.
It hasn’t happened yet, but Trans Union
are all monitoring the space to understand how it works and how to integrate it into traditional credit scores, according to their websites.
The Fed survey indicates that most people who use BNPL make their payments on time. Late payments, however, were more common among those earning less than $50,000 a year and among those who said they had lower credit scores.
So signing up for this BNPL service on your iPhone could potentially affect your credit score if you miss enough payments.
4. Good times don’t last forever
Finally, there is a risk that BNPL companies will change course, as offering zero-fee installment loans in an inflationary environment could become costly – and therefore fleeting.
As the world emerges from the dark days of COVID-19, the Federal Reserve may raise interest rates further in an effort to control rising inflation in the United States
The rise in interest rates has already affected housing market and credit card. If BNPL providers were to continue offering fee-free installment loans, consumers could potentially turn to them for larger and riskier purchases, which they might not repay in full.
Consider this: about 3.7% of outstanding loan dollars at BNPL Affirm AFRM,
were already at least 30 days late at the end of March, against 1.4% a year earlier, the Wall Street Journal reported. Losses were also increasing for Affirm, as well as Zip, another BNPL player.
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