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3 Reasons to Avoid Buy Now, Pay Later Plans

Our experts answer readers’ investing questions and write unbiased product reviews (here’s how we assess investing products). Paid non-client promotion: In some cases, we receive a commission from our partners. Our opinions are always our own.Buy now, pay later plans — installment loans that allow you to spread out payments over time — aren’t exactly new, but they’ve seen explosive growth over the last several years.According to the Consumer Financial Protection Bureau, buy now, pay later loans totaled $24.4 billion in 2021 — a 1,000-percent increase from two years earlier in 2019, where BNPL loans accounted for $2 billion. One reason for this growth is the ease of access; you’ve probably seen the option to finance purchases through Affirm and Klarna, and even PayPal has jumped into the space. Plus, BNPL lets the consumer break up payments over several weeks without fees or interest, as long as they don’t miss any payments.But Chloe Moore, a certified financial planner based in Atlanta, Georgia, says that buy now, pay later is still debt and that most people should steer clear of it.Here are three reasons why she advises her clients against using buy now, pay later:”Because of how easy it is to use these installment plans — it’s a soft credit pull and you do not need to have a high credit score — people may not be viewing these plans in the same way as their credit card bill or a personal loan from a bank,” Moore says. “And because of that, they are not aware of the very real financial impact these plans can have.”Since buy now, pay later is so easy to use, some consumers have multiple installment plans that they are paying in a month. But too often consumers end up under financial strain from juggling these payments along with their other expenses.”A person may only be looking at the one payment, but if you have a few of these and add in your regular bills, now you are actually paying more of your money out and it can sneak up on you,” according to Moore.”I tell my clients this whether they are buying a house, car, or anything else: Just because you break it into payments does not mean you can afford it,” Moore told Personal Finance Insider. “$500 is still $500 and if you cannot afford to add a $500 purchase to your budget, it is still going to be problematic whether you pay it in installments or not.”If you have multiple installments that you are paying with a buy now, pay later plan, you may be eliminating any breathing room in your budget. Even though it may seem like you can afford the smaller monthly payment, you are still putting your finances in jeopardy, because that money could go toward better things like paying down debt or building up your emergency savings fund.As a child, I would often hear my father say, “If I can’t pay cash, I can’t afford it.” That was a long time ago, and today some big items like a home or car may need to be financed, but you should think hard before jumping into buy now, pay later plans for smaller purchases.”If you find yourself on an installment plan for makeup from Sephora or groceries, that is a red flag and it’s time to take a look at your spending and see where your money is going,” Moore says. “Often BNPL leads people to buy things they cannot afford or do not need.” Consider using a budgeting app to help you get back on track with your spending.