Buy Now Pay Later Loans Explained

Welcome back to Dvorkin on Debt where we talk about personal finance and the economy.

 It's never been easier to buy now and pay later. From sneakers to streaming gear, services like CLA, Afterpay, Affirm, and Apple Pay Later are offering consumers, especially younger and lower income shoppers, an easy way to stretch a purchase into four payments. No interest, no credit check, no problem, right? Well, not exactly. 

On this episode of Dvorkin on Debt, we are digging into the growing risks behind defaulting on buy now pay later payments and why this trend could be quietly damaging your credit, your budget, and your financial future. 

Hi Howard. What happens when young people or low-income consumers default on their buy now pay later payments? 

Buy now pay later is where a company offers you the ability to buy what you want now with the ability to pay later at no interest.

Sounds great, doesn't it?

And it was usually used for bigger items, furniture, TVs, stereos. You know, if you bought a $1,000 TV, you would pay $250 every two weeks, and at the end of two months you would get that bill would be paid. However, people are smart and lenders are smart and they realize people don't pay in that time frame and these people will turn around and let it go and then all of a sudden you get charged interest on this interest free loan. And what happens is it just adds to your debt level. And it is a very big challenge now because initially some of the larger players weren't reporting to credit bureaus and now they are reporting to credit bureaus and it's screwing up younger people's credit. When originally this was made or this this was conceived, as I said, it was for bigger payments, bigger items. Well, now we're seeing that people are getting choked out and they're using all their outstanding credit balances and they don't have any more limit in their credit cards. So now they're going to this form of debt and they're sitting there charging groceries and car insurance and even gas. It's being used improperly. The best advice I could give people is stay away from buy now pay later deals.

So how is this impacting consumers credit scores? 

Well, it's going to obviously if you make the payments on time, you're it's going to have a positive impact. However, a lot of people are defaulting or extending these and it's reducing people's credit scores because if they extend, it's deemed another line item on their credit and that reduces your credit score. And if you default, that really reduces your credit score and that hurts you. Yeah.

So, are you ready for another rapid fire game? So, this one is true trouble or low risk. If something is an actual trouble, you'll say true trouble. Or if it's low risk, you will follow. Okay.

True, trouble, low risk.

Okay. First one.

Making on time buy now pay later payments boosts your credit score just like a credit card.

Low risk. Stacking buy now pay later plans on top of maxed out credit cards can lead to a financial disaster.

That's true trouble.

Buy now pay later is a smart way to buy groceries when money's tight.

Trouble.

Getting blocked from buy now pay later apps if you miss a few payments.

True trouble. I mean, you shouldn't if you're missing payments on that stuff.

That's a big sign you need to get help somewhere.

I agree. So, that's all I have for you today. Do you have any final words of advice for people who are struggling with their buy now pay later payments or these apps or thinking about getting into it? Listen, if you can't afford your credit cards, if you can't afford your home expenses, people should reach out to debt.com and try to get some advice and whether they do it themselves by reading our literature that's published online and go through or talk to a counselor, which is also free. 

We're going to help you and guide you to make the right decision for you, not for us. We will make you very well educated on your options and you get to choose what direction you want to go in.

All right. Well, thank you again, Howard, for joining me.