I Asked a CFP When It Makes Sense To Use Buy Now, Pay Later
Buy Now, Pay Later (BNPL) is a payment plan that has become controversial amongst experts. While Ken Koleman and George Kamel have referred to BNPL as “the dumbest financial move currently in America today” in a reel posted to Instagram, others have made solid cases for BNPL… under certain circumstances.
MoneyLion spoke with a certified financial planner (CFP) about the potential use cases for this popular payment plan and some possible financial headaches.
Buy Now, Pay Later Explained
Before we get into the nitty-gritty, let's explain what it is first. When making a purchase, BNPL is a payment plan which allows the customer to break the total amount due at checkout into smaller payments over time. Typically, 25% is due upon purchase with the remaining 75% made in subsequent installments.
Standard plans consist of four, interest-free payments over six weeks; longer term plans can charge up to 36% interest. And, unlike credit card payments which are made the same time each month, BNPL payments come due in rotating intervals. This means keeping track of due dates requires extra vigilance. And missing a payment means being charged late fees.
Critics argue it’s too easy to overspend, lose track of due dates, stack loans, and go into debt over frivolous purchases.
The Case for BNPL
Hayley Dickson is a CFP and the founder of RIPPL Wealth Management who stated BNPL can be an “appropriate tool for essential purchases when someone has just used much of their cash […] but still has strong income, healthy monthly cash flow and a proven history of saving.”
In other words, you can occasionally use BNPL to manage cash flow (for instance, if you prefer to let your money grow in a high-yield savings account or a certificate of deposit), but not to justify spending beyond your means.
A Real-World Example
Dickson gave the example of someone who has recently purchased a home and depleted their cash reserves on a down payment. Using BNPL to furnish their home using installment payments can be a practical cash flow strategy while their reserves are building back up. She doesn’t recommend furnishing the entire house with BNPL, but she argues it can be useful for essentials: A mattress, sofa, dining table, refrigerator, washer-dryer, etc.
Just make sure you maintain a strong monthly income and have an actual plan to pay it back.
The Test
Before using BNPL, Dickson recommends her clients give themselves the following test: “If you had to pay the full amount today, would you still buy it? If the answer is no, BNPL is probably not the right choice.”
Further, is the item essential? Dickson cautioned staying away from using BNPL on discretionary purchases like designer handbags, luxury accessories or expensive décor.
This article was provided by MoneyLion.com for informational purposes only and should not be construed as financial, legal or tax advice.