Should you opt for installment purchases or credit card rewards? Making the right decision.
Guide for Buy Now, Pay Later Travel Financing
🚨 Beware of the Risks with Buy Now, Pay Later (BNPL) Services 🚨
Buy now, pay later (BNPL) plans are becoming increasingly popular for funding travel, but they come with hidden dangers that consumers should be aware of.
More and more consumers are choosing BNPL services like PayPal Credit, Afterpay, and Affirm instead of credit cards for their purchases. A survey by C+R Research revealed that 38% of respondents believe BNPL will eventually replace credit cards for them.
But, is that a wise move? Let's dive in!
How BNPL works for Travel
BNPL lets you split the cost of a purchase into smaller, easily manageable installments. Payments can be made weekly, bi-weekly, or monthly. Clothing, electronics, furniture, appliances, and cosmetics are common purchases using BNPL services.
Some BNPL plans offer 0% annual percentage rate (APR), but others can have rates as high as 30%. Vendors like Affirm report your loans to credit bureaus, which could affect your credit score if you miss a payment or fall behind. Some BNPL services — like Flex Pay (formerly Uplift) — could conduct a hard credit inquiry when you apply, potentially impacting other loans or credit card applications.
BNPL for Travel
Travel brands like Delta Vacations, Expedia, Carnival, Alaska Airlines, Frontier Airlines, Spirit Airlines, Southwest Airlines, JetBlue, and Delta Air Lines are starting to offer BNPL options. They allow you to pay for travel in installments using services like Affirm, Klarna, or Flex Pay.
If the travel provider doesn't offer BNPL, you can still use BNPL services to finance travel. They provide a one-time-use virtual Visa card in the purchase amount, which you can use to complete your transaction on the airline's website.
The Attraction of BNPL
For travelers, BNPL acts like a reverse layaway system — you get the item right away and make payments later. Many services have apps to manage your account and make payments. Linking a debit or credit card to the BNPL service is typically required. Some retailers have partnerships with BNPL services, allowing you to use your account at checkout; for others, you might need to use the service's app to set up your payment.
Using BNPL could seem more appealing if traditional credit cards have high-interest rates or if you have poor credit. If you need to make an expensive purchase but don't have the funds available to pay in full, BNPL can be a wise choice for paying over time.
The Danger of BNPL
While 0% interest sounds great — if you're late on a payment, you'll be hit with late fees. If you link a debit card to the BNPL service, there's a risk of overdrafting your bank account, which can trigger additional fees.
Missing payments can lead to collection activities. Zip states on their website that accounts sent to collections for extended, overdue installments are an automated process — their representatives are not able to investigate why the order or its installments were sent to collections.
Contact with collections can impact your credit score and affect your ability to secure loans, rent an apartment, or even get a job in the future.
Furthermore, overspending and encouraging poor financial habits are concerns. A significant percentage (59%) of those surveyed by C+R Research admitted to purchasing unnecessary items through BNPL they wouldn't otherwise buy, while close to half (48%) reported being likely to make a late payment within the next 12 months.
Alternatives to BNPL
Some banks offer installment plans like Chase Pay Over Time, Pay It and Plan It by American Express, and Citi Flex Pay, which also allow you to earn rewards while spacing out payments. Signing up for a 0% introductory APR card is another option if you have longer-term expenses to pay off.
Remember, Buy now, pay later plans should not replace responsible credit card usage. Pay your monthly credit card bills in full, as most interest rates and fees may surpass the travel rewards you earn.
Sources:1. C&R Research - "Gen Z Loves Shopping, but Shifts Away From Traditional Credit". Link2. NPR - "Buy now, pay later loans have consumers juggling payments — and piling up debt". Link3. CBS News - "Buy now, pay later: Companies like Affirm, Afterpay and Klarna see boom in popularity during pandemic". Link4. Consumer Reports - "Buy Now, Pay Later Plans: What You Need To Know". Link5. Financial Times - "Buy now, pay later: lenders fear consumers will overcommit". Link
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- Credit card issuers are increasingly offering installment plans similar to buy now, pay later services, allowing consumers to earn credit card rewards and travel rewards while spacing out payments.
- In contrast to buy now, pay later services, some personal-finance experts suggest that signing up for a 0% introductory APR card could be a better option if you have longer-term expenses to pay off.
- Reviews of various credit cards reveal that some offer cash back rewards for dining, making it more financially beneficial to use a credit card instead of a buy now, pay later service for travel-related dining expenses.
- Guides on personal-finance management often advise against relying on buy now, pay later services for regular costs or expensive items, as missed payments can lead to late fees, overdrafting, collections, and potentially damaging one's credit score and future creditworthiness.
- News articles report that airline companies like Delta Vacations, Expedia, and multiple airlines are offering buy now, pay later options to finance travel, while some credit card issuers allow using their services to complete transactions on airline websites.
- Finance experts warn that while buy now, pay later services provide a sense of immediate gratification by allowing customers to get the item right away and make payments later, they should be used responsibly and not replace the practice of paying monthly credit card bills in full to avoid high-interest rates and fees.
