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What you need to know about 'buy now, pay later' plans before you sign up

In theory it sounds great, right? Make a big purchase, pay for it over time, with no interest or late fees, but as with everything, there's a catch.

GOLDEN VALLEY, Minn. — When you're buying anything these days, you've likely noticed the option to pay it off in chunks, usually four or more payments, over time, with no interest. It’s called "buy now, pay later" and it became kind of a "thing" during the pandemic, when it was offered as a way to pay for those popular Peloton bikes. 

While the concept may sound like a no-brainer, there are some pitfalls you should be aware of before you sign up.

“It's really being marketed as more of a responsible way to buy things rather than put them on a credit card,” says Kevin Brasler with Consumers’ Checkbook.

More responsible, because it allows you to make bigger purchases, and spread out the payments without paying interest or late fees. 

Sign me up, right? Well, let's talk fine print shall we?

“The problem is, most consumers who are signing up for 'buy now, pay later' don't understand what they are signing up for,” says Brasler.

You knew there had to be a catch.

“It makes it seem, a lot of times for example, oh it's four equal payments, I have four months to pay for this thing. Well, that's not true. The first payment is due right away, and usually the second payment is two weeks, and then another two weeks and another two weeks. It's not spread out for four months,” he says.

Merchants, and even travel companies and airlines, are teaming up with these third party companies, like Affirm, Afterpay, Zip, Pay in Four and Sezzle. But not all are equal. Some do charge late fees or interest, and if you have the payments tied to a debit card or credit card, you could end up with over drafts and fees anyway. For those with less than stellar credit, this is not your best option to build it up.

“A big problem with these plans is they're going to report to the credit bureaus if you don't pay, so it could have a negative impact on your credit score if you fall behind payments, or you default on this little mini loans, but they're not reporting favorable transactions yet,” Brasler says.

Buy now pay later is a good option if you know you'll have the money, but just don't want to or can't really hand it all over in one chunk. Just know what you're agreeing to before you agree. 

And one more thing to note; When you purchase something using a credit or debit card, you have certain protections. If you're unhappy with the purchase, it never arrives, or you are a victim of fraud, you can dispute the charges. "Buy now, pay later" companies do not fall under the same Fair Credit Billing Act.