5 buy now pay later headaches to avoid this holiday season

(NerdWallet) – Shoppers filling their carts this holiday season will likely be able to “buy now, pay later” at the checkout.

Known as BNPL for short, these payment plans break up your purchase into smaller, equal parts, often with no interest or commission if you pay on time.

If you’re looking to stretch your gifting dollars further, BNPL might seem like an obvious choice. But it’s still debt, and it comes with risk.

Here are five common problems you may face with BNPL and how to avoid them.

1. Long repayment periods

BNPL plans generally follow a quadruple payment model: your total purchase amount divided by four, with each payment at two-week intervals.

For example, if your total is $200, you will pay $50 at checkout. The remaining three payments—$50 each—are billed to your debit card, credit card, or bank account every two weeks until the loan is paid off.

It may sound simple enough, but six weeks is a long time to pay off a holiday purchase, says Eric Nero, a certified financial planner in Gansevoort, New York.

“BNPL is tapping into the basic human instinct of wanting it now, but it’s just another way to separate people from their money,” he says. “It would be much better to budget or save for this gift than to spread it out over several weeks.”

Depending on the lender, payments can even stretch out over several months. Affirm, which works with retailers such as Amazon and Walmart, typically offers three-, six- and 12-month terms in addition to four monthly payments. Two other lenders, PayPal and Afterpay, recently announced their monthly payment plans with terms ranging from six months to two years. These plans tend to charge interest.

Avoid this: At checkout, you may see multiple BNPL options. As long as you can afford the installment plan, choose the shortest plan, which is usually four times the payment. Better yet, consider a more affordable gift that doesn’t require you to split the payments.

2. Ease of overspending

One of the most frequently cited concerns about BNPL is that it encourages overspending even among responsible shoppers, because small payments make people feel like they are spending less than they are.

This problem tends to get worse if you have multiple BNPL loans, which is not uncommon. Recent NerdWallet survey on BNPL found that 30% of Americans had used BNPL in the past 12 months. These BNPL users accessed the funding source an average of six times.

Nero says that while these amounts seem reasonable at face value, they add up and often keep his clients from achieving their big goals.

“I call it twenty-dollar spending until death,” Nero says. “You spend $20 here and $20 there, and then all of a sudden you’ve spent $100 that month. But where are your savings?”

Avoid this: Stick to one BNPL loan this festive season and reserve it for a special gift that might be a little higher than yours holiday budget. Just make sure you can afford the installment plan without sacrificing other financial goals.

3. Unexpected fees

A September study by the Consumer Financial Protection Bureau found that BNPL’s user fees are on the rise.

According to the study, most of these are late payment penalties, which are around $7 per missed payment and are sometimes limited to a percentage of the purchase or payment amount.

But there may be other fees depending on the lender. Zip, which lets you buy now, pay later at any retailer that accepts Visa cards, charges $1 for a convenient installment fee. This means that any purchase you make with Zip will cost an additional $4.

Some lenders also charge a fee to reschedule or reactivate your account after it has been suspended for a missed payment.

You may also face fees on the other side of the transaction. For example, if you link your BNPL loan to a debit card, lose track of your payments and overdraw your account, your bank may charge you an overdraft fee. These fees can range from $30 to $35 and in extreme cases can lead to the bank closing your account.

“Just like any other loan product, you have to make sure you can afford the payments,” says Laura Udis, senior manager of the dollar, marketplace and installment lending program at the CFPB. “Even if the lender approves your application, you should check that you have sufficient funds in your bank account.”

Avoid this: Before opting for a BNPL plan, read the loan agreement carefully to understand the fee structure. Consider whether you will be able to make your payments on time throughout the life of the loan, and keep in mind that most BNPL lenders automatically deduct payments from your debit card, credit card or bank account.

4. Cunning returns

Anyone who has shopped for a distant relative knows how important it is to be able to return an item. But with BNPL, returns are complicated because you’re actually dealing with two parties: the store you bought the item from and the creditor you paid it to.

When returning BNPL, you will deal with the store first. If a store accepts a return, it will refund the creditor who paid for the item. You then have to wait for the lender to put the money back into your account. There is usually a delay which means you may be stuck paying for an item you have already returned.

Consumers report that stores sometimes have problems returning items purchased with BNPL. And if you need to file a dispute, contacting a lender’s customer service department can be difficult, as not all lenders provide an easily accessible phone number.

Avoid this: Do not use BNPL for gifts you are not sure about. If you’re buying clothes for someone else and don’t care about size or color, buy directly from the store to make returns easier.

5. Negative credit reporting

Most BNPL lenders don’t report your payment history to credit bureaus, which means you can’t use a BNPL plan to build up your points, unlike a credit card or personal loan.

However, in some cases, BNPL can severely damage your credit score, especially if you default on your loan.

“If the consumer ultimately doesn’t pay, the remedy is usually to freeze the account so the consumer can’t use it again,” Udis says. “Depending on the firm, BNPL may charge late fees and even debt collection.”

For example, Klarna, which works with retailers such as Macy’s and Bed, Bath & Beyond, is turning over unpaid debts to a debt collection agency after a series of overdue reminders.

Having a debt in collection can result in higher fees and appear on your credit report – sometimes for years – damaging your score and making it harder to get approved for credit in the future.