Avoid the Risks of Having Multiple Buy Now, Pay Later Loans

“Buy now, pay later” promises simple payment plans that can make financing your next purchase easy and affordable.

These plans typically divide your total purchase into four equal installments with zero interest. The first installment is due at checkout, and the remaining three are due every two weeks until the loan is paid in full.

But even a simple payment plan can turn complicated when you’re juggling three or four of them at a time — a problem unique to buy now, pay later, which unlike other forms of financing, doesn’t look at similar existing debts when extending an offer.

While certain debts like credit cards and traditional loans are reported to the three major credit bureaus, buy now, pay later loans typically aren’t, so lenders don’t know how many loans you have outstanding and can’t assess your ability to afford more.

This will likely change in the coming months as TransUnion, Equifax and Experian work to increase the visibility of buy now, pay later on credit reports to better track the loans across lenders, while still protecting the credit scores of consumers who may be taking out multiple loans in a short period of time and successfully paying them off.

For now, borrowers can continue taking on debt from multiple buy now, pay later providers. And though plans may be advertised as no-cost, the consequences of falling behind are anything but, says Marisabel Torres, director of California policy for the Center for Responsible Lending, a nonprofit research and policy organization.

“There needs to be more transparency,” she says. “It’s not just, ‘zero financing, zero fees.’ If you miss a payment, you will incur fees. You will incur some type of penalty.”

While many buy now, pay later providers charge late fees, which can dig borrowers further into debt, others send defaulted loans to collections, jeopardizing borrowers’ credit scores.

There are also consequences on the other side of the transaction. Even if a buy now, pay later provider doesn’t penalize you for falling behind, your bank might if you overdraw an account tied to the loan, like a debit card.

“Could you be triggering nonsufficient fund fees or overdraft fees? Could you be kicked out of the banking system? Those are very real consequences that are tied to not being able to keep up with a loan payment,” Torres says.

For borrowers who take multiple buy now, pay later loans, the most important thing to do is plan your spending ahead of time, says Jordan Nietzel, a certified financial planner based in Columbia, Missouri.

If you don’t already follow a monthly budget, start by reviewing your income and expenses over the past three months to identify how much money is coming in and going out.

Assuming there’s a surplus of income you want to spend on buy now, pay later purchases, set a total dollar limit for what you can commit to monthly payments, instead of evaluating loan offers individually.

Nietzel says looking at buy now, pay later loans as a whole is particularly important since the small installments make the debt seem more manageable than it is.

“We tend to think, ‘Well, no big deal, I can definitely make this $10-a-month payment,'” he says. “You don’t realize that if you do that several times, those payments stack onto each other.”

Budgeting can also help address one of the top concerns about buy now, pay later: the ease of overspending at checkout.

Since buy now, pay later plans automatically divide your purchase, it’s easy to lose sight of what you originally planned to spend. For example, a $100 purchase becomes $25 with a pay-in-four plan. For some shoppers, this could mean filling their carts with more items.

Paul Paradis, president of Sezzle, a buy now, pay later provider that partners with Target and other retailers, says his company has little to gain from encouraging customers to overextend themselves.

“Since we don’t charge interest, and we make the vast majority of our revenue from our merchant fees, we actually lose out if we encourage overspending,” he says. “Unlike credit cards that make money when people don’t pay on time, we lose money when people don’t pay us back on time.”

However, Nietzel and Torres note that the willingness of major retailers to pay merchant fees in the first place likely means consumers are spending more.

If buy now, pay later plans tempt you to overspend on a regular basis, you’re better off ditching them.

“It may seem like it’s easier for your cash flow to stomach, but over the long haul you’re paying the same amount,” Nietzel says. “So if it’s causing you to buy more than you would’ve otherwise, that’s when it really becomes a problem.”