Apple offers “Buy now, pay later”. 4 reasons to think twice before signing up

After months of speculation, Apple (AAPL,
+1.76%
) finally unveiled its buy now, pay later offer this week, floundering in an industry that has seen explosive growth. But consumers should be wary of jumping into the service and consider some of the potential pitfalls, observers say.

Buy now, pay later (BNPL) startups offer a simple product (at least on the surface): a consumer who uses the product to make a purchase can split the cost into four smaller installments, which are mostly interest-free, some weeks.

BNPL companies have partnerships with an ever-increasing number of retailers — from American airlines
AAL,
+2.39%
at Ritual Aid
GDR,
+1.10%
– which greatly increases the number of stores a user can visit to use the pay later service. Companies make money by charging these merchants a fee on every purchase.

Apple’s BNPL product is powered by the Mastercard network and will be available wherever Apple Pay is available.

CREDIT: APPLE WWDC/YOUTUBE

Already a hot commodity, the entry of a tech giant like Apple is likely to spark renewed interest in BNPL, analysts say. Apple’s BNPL product is powered by the Mastercard MA,
+1.08%
network and will be available wherever Apple Pay is available. Payments can be managed on the iPhone itself via Apple Wallet.

Apple did not immediately respond to a request for comment on its Buy Now, Pay Later program.

Prior to Apple’s announcement, more than 10% of American adults surveyed by the Fed in 2021 said they had used a BNPL service in the past year. 78% did so for convenience and 53% did so to avoid using a credit card. Worryingly, around half said it was “the only way they could afford their purchase”. BNPL was more common among low-income and less-educated people, the Fed detailed.

The login page for Afterpay, one of many “buy now, pay later” companies. About half of people who had used BNPL said they did so because it was “the only way they could pay for their purchase”, according to a Fed survey of US households.

Bloomberg

Here are four reasons why shoppers might want to exercise caution before signing up for Buy Now, Pay Later programs, according to experts.

1. Interest-free installments don’t mean “buy now, pay later” is cheaper

By splitting a payment into four and making an expensive item “cheaper” and more manageable by paying in installments, there is a potential risk of overspending.

Consumers using BNPL “need to be very careful about the total cost of ownership,” Ted Rossman, senior industry analyst at CreditCards.com, told MarketWatch. “Don’t just fall into this trap of ‘Oh, it’s only four payments over six weeks – that’s not that bad.’ What is the actual amount you owe? Are you mixing this with other buy now, pay later plans?”

“You just have to be careful not to overspend because $50 here and $50 there can really add up,” Rossman added. “There is a risk of overspending.”

Klarna is a new “buy now, pay later” service provider.

Getty Images

2. Using buy now, pay later for essentials could be a sign of financial distress

There is also the potential for unnecessary deferral of payments, especially for essential goods, which could become a band-aid masking larger financial problems.

For example, as BNPL operators partner with companies that provide essential goods – from service stations at grocery stores — people may consider using installment payments for such services.

“There’s going to be a big market for things like gas and groceries,” Rossman said, and “it worries me, it’s kind of like robbing Peter to pay Paul.”

Particularly in this inflationary environment, with high gas and grocery prices, it is tempting to use BNPL to defer costs.

But if a BNPL user spreads out their payments over six weeks, “I’m worried if you can’t afford the gas now,” Rossman said, because “in six weeks you’ll need more gas. .. it’s just kind of like you’re upside down.

3. Buy now, pay later could potentially affect your credit score in the future

The absence of a BNPL payment may not result in the same penalties as the absence of a credit card payment.

Late fees are not substantial, as of now. But with credit bureaus reviewing BNPL and considering how to factor them into users’ credit scores, there is a possibility of damage to your credit rating in the near future.

It hasn’t happened yet, but Trans Union
TRU,
+1.29%,
Equifax
EFX,
+0.54%,
and Experian
EXPGY,
-0.95%
all monitor buy now, pay later to understand how it works and how to incorporate it into common credit scores, according to their websites.

The Fed survey indicates that most people who use BNPL make their payments on time. Late payments, however, were more common among those earning less than $50,000 a year and among those who said they had lower credit scores.

So signing up for this BNPL service on your iPhone could potentially affect your credit score if you miss enough payments.

Apple Pay has become widely used since its launch in 2014.

Photo by Bryan Thomas/Getty Images

4. The good times may not last forever. for BNPL users

Finally, there is a risk that BNPL companies will change course, as offering fee-free installment loans in an inflationary environment could become expensive – and therefore short-lived.

As the world emerges from the dark days of COVID-19, the Federal Reserve may raise interest rates even more than it has already in an effort to control rising inflation in the states. -United.

The rise in interest rates has already affected housing market and credit card. If BNPL providers were to continue offering fee-free installment loans, consumers could potentially turn to them for larger and riskier purchases, which they might not repay in full.

Consider this: about 3.7% of outstanding loan dollars at BNPL Affirm AFRM,
+2.66%
were already at least 30 days late at the end of March, against 1.4% a year earlier, the Wall Street Journal reported. Losses, in part related to late payments, were also increasing for Affirm, as well as for Zip, another BNPL player, the Journal reported. Affirm said the increase in late payments was linked to looser underwriting standards; Zip said some of his losses were related to “companies he acquired in 2021,” the Journal reported.

Write to: [email protected]

Kayleen C. Rice