The holiday season can be financially straining, which is why many people rely on borrowed money to cover costs. The demand among shoppers for long-term financing options has fueled the rise of a payment option known as "buy now, pay later" — sometimes referred to as BNPL.
Buy now, pay later services let you break your purchase into multiple interest-free payments over the course of a few weeks or months. Companies like Affirm, Afterpay and Quadpay offer this payment option at major online retailers like Amazon and Walmart.
About 1 in 6 (17%) of Americans plan to use a BNPL service to pay for holiday shopping, according to a new survey by Marcus by Goldman Sachs. This payment option is particularly popular among the younger generations — 28% of Gen Z consumers and 27% of millennials will utilize it this holiday season.
But before you choose this financing option at checkout, it's important to know about the risks associated with buy now, pay later apps. Weigh the benefits and drawbacks of using BNPL options to finance holiday shopping, and consider your alternatives like credit cards and personal loans. If you decide to borrow money this holiday season, be sure to compare interest rates on Credible to ensure you're getting a good deal.
What to know about using a buy now, pay later service
The idea of buying now and paying later does have its allure. Instead of making a lump-sum $200 payment upfront for a pricey holiday gift, a consumer may be able to pay $50 installments every two weeks until the purchase is paid in full. These services typically don't require a hard credit inquiry, and some BNPL providers don't charge interest or fees.
That being said, BNPL financing can come at a steep price. Missing scheduled payments can also result in steep late fees of up to 25% of the past-due amount, depending on the company you use. Some BNPL apps, such as Affirm, charge high interest rates of up to 30% APR.
Plus, if you don't repay the balance when it's due, you may be reported to the credit bureaus as delinquent. This can damage your credit score and make it harder to lock in good terms on financial products in the future.
Before you agree to a BNPL agreement at the time of purchase, read the terms and conditions closely to search for hidden fees.
Alternative ways to pay for holiday expenses
Putting aside money all year to cover holiday costs is the best way to cover expenses without worrying about interest, late fees and credit dings.
But the holiday season has a way of sneaking up for you — and suddenly, it's time to buy Christmas gifts, turkey for Thanksgiving dinner and even plane tickets to visit family. While many consumers are doing all they can just to pay off debt from last holiday season, it's easy to forget about the upcoming one.
Finding a way to spread holiday spending over a longer-term payment plan makes it easier to afford the sudden expenses. But if you don't want to take the risks of using a buy now, pay later service, you have alternatives:
Read more about each payment option in the sections below.
Putting Christmas gifts and other holiday expenses on a credit card can be an easy way to rack up high-interest debt. However, there is one strategy that can help you finance purchases without paying interest.
Creditworthy borrowers can consider opening a new credit card with a 0% APR introductory period. These promotional periods can last up to a year or more, depending on the credit card issuer. Here are a few things you should know about zero-interest credit card offers:
- You'll need a good credit score to lock in a 0% APR credit card offer
- Be mindful of any fees, such as annual fees and late payment fees
- Create a debt payoff plan to repay the balance before the period expires to avoid interest
If you just need a small sum of money to cover all your holiday expenses, consider borrowing a holiday loan.
Holiday loans are lump-sum personal loans that you repay in fixed monthly payments over a set period of months or years. Lenders determine your eligibility and estimated interest rate based on the length and amount of the loan as well as your creditworthiness.
Interest rates are fixed, so you have a predictable debt payoff plan. Plus, personal loan interest rates are typically lower than credit card interest rates. The average rate on a two-year personal loan was 9.39% in August 2021, according to the Federal Reserve, compared with 17.13% for credit card accounts assessed interest.
Because personal loan rates can vary greatly from lender to lender, it's important to shop around and compare offers before you choose a loan. You can compare interest rates for free on Credible with a soft credit check, and use a personal loan calculator to estimate your monthly payments.
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