With travel expected to increase this holiday season compared to last year, more consumers are using buy now, pay later (BNPL) services to pay for expenses such as hotels and plane tickets. But while BNPL apps can help your cash flow and save you from paying credit card interest, they also have their downsides.
Buy now, pay later service allows you to make a purchase and then pay it back in multiple steps over time, just like using a credit card. The main advantage of a credit card is that there are no fees or charges if you pay according to the terms.
Customers are turning to the BNPL app for a number of expenses, including buying holiday gifts after taking advantage of Black Friday and Cyber Monday discounts. Most of the purchases made with BNPL are apparel and specialty products such as electronics and jewelry, but travel and entertainment are among the fastest growing sectors, according to the Consumer Financial Protection Bureau (CFPB).
From December 23, 2022 to January 2, AAA estimates that 112.7 million people will drive 50 miles or more, up 3.6 million from the previous year. Expect a 14% increase in air travel with 7.2 million Americans expected to fly.
Companies like American Airlines and United Airlines have partnered with BNPL providers like Affirm and Uplift to allow you to pay for your vacation and travel in installments, which can mean you pay for your trip when you get home.
Benefits of using BNPL
For customers with tighter budgets, due to rising inflation and rising interest rates, the BNPL app provides an opportunity to make purchases and pay them over time without interest. If BNPL payments fit your budget, this strategy can help you maintain a healthy cash flow, ensuring you have more money to pay for other expenses.
Compared to using a credit card, which charged an interest rate of 22.12% in December 2022, according to Investopedia data, BNPL’s service can save you interest while providing a long repayment period.
BNPL app becomes more profitable to use credit card as the interest rates go up. Most credit card companies tie their interest rates to the Federal Reserve’s interest rate, which has been rising as the Fed tries to curb inflation. Recently, the Fed raised the key interest rate by half a percentage point from 4.25% to 4.5%.
Lack of reliance on BNPL
If used with a good budget plan, BNPL services can be a useful financial tool that allows you to buy and maintain your income. However, they can also cause financial difficulties if not used properly.
If you don’t pay on time, BNPL services can charge late fees. In fact, late fees are becoming common. About 10.5% of BNPL users paid late in 2021, up from 7.8% in 2020, the CFPB reported.
Customer protection of BNPL services is also inconsistent. Unlike credit cards, BNPL services are not regulated by individual states. Therefore, for example, they may not provide clear statements about the cost of debt. BNPL users may be forced to enter autopay or have some rights against charges. Without customer protection, BNPL services can charge multiple late fees for missed payments. The CFPB said it is working to improve regulations on BNPL.
“Due to their rapid growth, we want to ensure that the buy now, pay later companies are subject to the appropriate control tests, like credit card companies,” said the director CFBP Rohit Chopra in a statement.