The Problems with Using “Buy Now, Pay Later” to Fund Travel

You can book a hotel or flight now and pay off it later. This is a growing trend in travel spending. American Airlines, United Airlines, and Vacasa offer “buy now, Pay later” services that allow you to make reservations and then pay back incrementally over time.

According to a September 2022 report by the Consumer Financial Protection Bureau, entertainment and travel purchases were the fastest growing segment of the buy-now, pay-late phenomenon .

Affirm, Afterpay, and Klarna offer a short-term option for online purchases: buy now, pay later. The buyer receives their order immediately and then pays it back in four or monthly installments.

Although buy now, pay later has been a popular strategy for many years in certain segments like apparel and beauty, it is slowly growing in other areas such as insurance and education, and even groceries. Travel is outpacing all of them.

Travel-related services that are buy now and pay later were only $10 million in 2019. It reached $60 million in 2020, $800 million by 2021 and an astonishing 1,233% increase in one-year. This is an incredible 7,900% increase.

However, this growth is not necessarily positive. The CFPB warns that it is a worrying trend.

Pay later, buy now can lead to confusing terms, difficulties in filing and resolving disputes and strict requirements like autopay. Experts warn that buying now and paying later can lead to shoppers taking on more debt than they are able to afford.

Late fees are often charged by many buy now, pay it later services, which typically cost around $8. The CFPB estimates that 10.5% of borrower who buy now and pay later were subject to at least one late charge in 2021.

Buy now, Pay Later loans may require autopay. This can cause problems for people with insufficient funds in their associated payment accounts. They could be charged a late fee by the buy now and pay later company as well as an extra fee from their bank.

The CFPB reports that 89% of 2021’s pay-later, buy-now repayments were made using a debit card. This opens up the possibility of overdrafting accounts with insufficient funds. According to Morning Consult’s market research organization, one in three buyers who use buy now-pay later reported that they had overdrafted in January 2022. Overdrafts usually come with a fee.

Paying for buy now and pay later with credit cards is not a good idea, although some people do it.

According to the Center for Responsible Lending, “Using a credit card to pay other debt is an indication of inability to repay.”

Shoppers’ purchase data can be accessed by Buy Now, Pay Later services, which can then use it in future marketing campaigns, likely to encourage more spending. Consumers are also at risk from other types of overextension.

The 2022 Motley Fool survey revealed that there are many reasons to use pay later, buy now

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  To purchase items that are beyond my means (45%).
  

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  To borrow money with no credit check (21%).
  

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  I have trouble getting approved for a credit-card (14%).
  

• 
  My credit cards are maxed (13%).
  

Interest-free buy now and pay later purchases are a cost-effective alternative to credit cards that charge interest for outstanding balances. With fixed payment dates and fixed amounts, buying now, paying later may be a good option for budgeting. For cash-strapped individuals who have to travel urgently, such as to visit a sick relative or for other reasons, buying now and paying later may be the best option.

Others may find that buy now and pay later services are a great way to free up cash flow. Chris Panteli, a financial coach online based in the U.K., needed to take a vacation after a difficult year that saw Panteli lose his partner and work hours that were too long.

He was still working with his ex-partner to divide his finances and needed cash to fund his small business. AfterPay helped him pay $1,200 for his trip to Turkey. He paid four installments over six week.

He says, “There was no way that I would not make my payments.” “I could not see the downside .”

It worked for Panteli. It doesn’t work for everyone, and the CFPB claims it is working to fix it.

While buy now, and pay later providers are subject to federal and state oversight, not all states require that all buy now, or pay later products be licensed or registered. Rohit Chopra, Director of CFPB, stated in a September 2022 Statement that this could change.

“We will work to ensure that borrowers have the same protections regardless of whether they use credit cards or buy now, pay back later loans. ”

This article is by NerdWallet. It was originally published in The Associated Press.