Buy Now, Pay Later and How It Can Sink Your Retirement Budget
Key Points
Most BNPL programs don't charge interest unless a payment is missed.
While most BNPL programs offer interest- and fee-free loans, that's not true of all.
The ease of using BNPL makes it easy to spend more than you intend.
- The $23,760 Social Security bonus most retirees completely overlook ›
In 2024, consumers spent $82.4 billion on buy now, pay later (BNPL) programs. BNPL is a financing option that allows you to purchase goods or services immediately and pay for them over time. BNPL plans typically involve no interest or fees if the customer pays on time, making the service an attractive way to buy what you want today, particularly for those who depend on Social Security or other fixed income.
Given these uncertain times, it's easy to understand why so many Americans have turned to BNPL. However, if you've become dependent on BNPL to purchase the things you need, it could hurt your finances.
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How BNPL works
Imagine you're shopping online and, as you check out, you see that BNPL is available. If you decide to try BNPL, you'll find:
- You may be required to provide some basic personal information. The information may be used to run a soft credit check. Unlike a hard credit check, a soft check does not affect your credit score.
- If approved, you will normally be required to put 25% down and select a payment plan that splits the cost of your total purchase into three additional interest-free payments, each due two weeks apart.
- If you make a larger purchase, you may be given more time to repay.
- The remaining balance is paid off in installments. These payments are typically deducted from your bank account or charged to a credit card.
- Some BNPL services charge interest on any balance remaining if it's not repaid within a stipulated timeframe.
While BNPL can be a convenient way to cover the cost of the things you want and need, here's how it could affect your retirement budget.
Increased debt
Any time you take on new debt -- whether it's reported to the credit bureaus or not -- you're left with less money to do the things you want to do, like investing in real estate or taking a trip somewhere you've always wanted to visit.
Cash flow issues
Given the ease of buying the things you want with BNPL, it's easy to take out multiple BNPL loans, miss a payment, and face late fees and/or an interest rate as high as 36%. When cash flow becomes an issue, you may find yourself drawing money from savings or cutting back in another area.
Opportunity cost
Opportunity cost refers to the value of what you don't do when choosing to do something else. Suppose you regularly find yourself making purchases via a BNPL plan. In that case, you have less money to do micro-investing or increase the equity in your home by making improvements or pre-paying your mortgage. In other words, spending more than you budget on BNPL purchases means having less money to continue securing your financial future.
Resisting temptation
The PartnerCentric survey revealed that more than 50% of Americans use BNPL for some of their purchases. The issue isn't making purchases you can afford. It's buying things you don't need because smaller payments make it feel so manageable, even if you're paying more than you would if you shopped around and paid the full amount upfront.
Disrupting you financial plan
As a retiree, you undoubtedly continue to plan for the future. However, predicting future expenses and cash flow can be difficult once you've added a new bi-weekly payment to your monthly budget. What you want to avoid is the need to take money from your emergency fund to cover your BNPL payments or other expenses.
As long as you've carefully read the fine print and understand how it works, there is nothing inherently wrong with making BNPL purchases. The trick is to ensure you can still meet your financial goals once you've made a purchase.
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