AYESHA RASCOE, HOST:
Buy now, pay later. That sounds good, but is this financial service right for you? You've likely seen those pay-in-installment options when paying for something online. They're a form of credit offered by financial technology companies like Klarna, Afterpay or Affirm that largely work how they sound. They loan you money to buy goods instantly and allow you to pay them back over time. According to the Consumer Financial Protection Bureau, 1 in 5 shoppers has now used BNPL loans to make a purchase. Life Kit's Andee Tagle is here to help us walk through some of the pros and cons. Hey, Andee.
ANDEE TAGLE, BYLINE: Hey, Ayesha.
RASCOE: All right, so these are advertised for everything from furniture to groceries. Before someone clicks on that offer and says, yes, let's do it, what do they need to know?
TAGLE: BNPL loans are a financial tool, so they're not inherently predatory to consumers. You just have to be smart about how and when you use them. And there are a lot of reasons why people really like them. Many loans are interest-free and offer longer repayment plans than the typical 30 days you see with a credit card, making them great to free up your cash flow and break up big or surprise purchases, and there's no long-term commitment, usually, to a financial institution. So once you pay off your loan, your relationship with that BNPL company is done, but it can be easy for people to get carried away, and one reason why is the lower bar to access. Getting a BNPL loan is super quick and easy. I applied for one for patio furniture, in the name of research, of course, and it was approved in about a minute and all I needed to provide was basic contact info - my birthday and a form of payment.
RASCOE: Well, that doesn't seem like a lot of information for the company to make the decision off of.
TAGLE: I know, I know. I spoke to Ed deHaan about this. He's a professor at Stanford's Graduate School of Business, and he says these companies use algorithms to analyze available online data about consumers to assess them for risk and approve them for loans. And that's opened up a new credit pathway, specifically for young people and people with poor or limited credit history, which can be a double-edged sword.
ED DEHAAN: It's good in that a bunch of people are getting access to credit that didn't have it before. The bad thing is that those characteristics are the same characteristics of people who tend to get into trouble with debt. Because they don't have that experience yet, they tend to overspend and then have trouble paying off their balances, which can lead you into a debt spiral.
RASCOE: So this is where it gets to get kind of dangerous or tricky, right?
TAGLE: Yeah, absolutely. When - you know, when you break down your shopping cart into small numbers, it can be easy to trick yourself into thinking you have more money than you do. This is according to a 2024 study out of Harvard. So, you know, if you set out to make a hundred-dollar purchase but only have to pay $20 upfront or maybe nothing at all - depending on the plan you choose - you might feel more liquid than you are. And the other part of this, according to deHaan, is that BNPL companies create ultra-tailored shopping experiences in their apps because they have access to your browsing and purchasing history. His analogy is when you go to check out at the grocery store, they have impulse buys lined up, but those have to appeal to a wide audience - right? - gum, magazines, candy bars.
DEHAAN: But with BNPL, they put the exact products in front of you that you really want, which makes that impulse purchasing very powerful.
RASCOE: So given that risk and, you know, those impulses at play to get some retail therapy, is there a time when a BNPL loan is a good idea?
TAGLE: Oh, absolutely, Ayesha. You know, what deHaan told me is as long as you're responsible, these loans carry no more inherent risk than a credit card. They are newer, though, and they work differently than other financial products. So you're going to want to keep some things in mind. First, read the fine print before you sign up. Every BNPL company offers different payment structures, terms and fees for late or missed payments. If you like using these loans, consider sticking with one BNPL provider. Each loan is on its own payment cycle, so having them all under one roof can make it easier to keep track of all your bills. And you might also think about syncing up those payments with your paydays to avoid any potential overdrafts. And a final note - because it's a common misconception, you're likely not contributing to your credit history when you're repaying these loans. BNPL companies generally don't report to the credit bureaus. So just something to keep in mind.
RASCOE: That's Life Kit reporter Andee Tagle. Thanks so much.
TAGLE: I hope it helps, Ayesha. Happy shopping.
RASCOE: If you want more personal finance tips, check out NPR's Life Kit podcast at npr.org/lifekit.
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