Since travel is 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 airline tickets. But while BNPL apps can help your cash flow and save you interest on credit cards, they also have downsides to consider.
Buy now, pay later services allow you to make a purchase and then pay it off in multiple installments over time, as if you were using a credit card. The main benefit of credit cards is that there are no interest rate charges or fees if you pay according to the terms.
Consumers turn to BNPL apps for a number of expenses, including buying holiday gifts as they take advantage of retail discounts on Black Friday and Cyber Monday. The majority of purchases made with BNPL are apparel and personal effects such as electronics and jewelry, but travel and entertainment are among the fastest growing segments, according to the Consumer Financial Protection Bureau (CFPB).
From December 23, 2022 to Jan. 2, AAA estimates that 112.7 million people will travel 50 miles or more, up 3.6 million from last year. It expects 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 vacations and travel in small increments, which often result in paying for your trip. after you get home.
Benefits of Using BNPL
For consumers with tighter budgets, due in part to inflationary trends and rising interest rates, BNPL apps make it possible to make purchases and pay them over time without interest. If BNPL rates fit your budget, this strategy will help you maintain a healthy cash flow, ensuring you have plenty of cash available to pay other expenses.
Compared to using credit cards, which charge a median interest rate of 22.12% as of December 2022, according to Investopedia data, BNPL services can save you interest while still providing a long time to payment.
BNPL apps have become more advantageous than using credit cards because of the increase in credit card interest. Most credit card companies tie their interest rates to the Federal Reserve’s prime rate, which is increasing as the Fed tries to curb inflationary trends. Most recently, the Fed raised its key interest rate by half a percentage point to a range of 4.25% to 4.5%.
Damage to BNPL’s Trust
When used with careful planning for your budget, BNPL services can be a helpful financial tool to allow you to buy and maintain your cash flow. But it can also cause financial hardship if it is not used properly.
If you do not make your payment on time, BNPL service may charge late fee. In fact, late payments are becoming more common. About 10.5% of BNPL users were charged late fees in 2021, up from 7.8% in 2020, the CFPB reports.
Consumer protections for BNPL services are also inconsistent. Unlike credit cards, BNPL services are not regulated in every state. So they may, for example, fail to provide clear cost-of-credit disclosure. BNPL users may be forced to autopay or have less right to dispute charges. Without consumer protection, BNPL services may charge more late fees on the same unpaid bill. The CFPB says it is working towards improving regulations on BNPL companies.
“Given their rapid growth, we want to ensure that buy-now, pay-later companies are subject to appropriate regulatory scrutiny, just like credit card companies,” said CFBP director Rohit. Chopra in a statement.
