Apple offers “Buy Now, Pay Later”. 4 reasons to think twice before signing up


After months of speculation, Apple (AAPL,
+1.55%
) finally unveiled its buy-now-pay-later offering this week, venturing into an industry that’s seen explosive growth. But consumers should be cautious about getting on the service and consider some of the potential pitfalls, observers say.

Buy now, pay later (BNPL) startups offer a (at least superficially) simple product: A consumer using the product to make a purchase can split the cost into four smaller, mostly interest-free, installments and pay over a couple of weeks.

BNPL companies have partnerships with an ever-growing number of retailers – from American Airlines
EEL,
+1.56%
to rite aid
WHEEL,
0.00
– which significantly expands the number of stores a user can visit to use the Pay later service. The companies make money by charging these merchants a fee with every purchase.

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

CREDIT: APPLE WWDC/YOUTUBE

Already a scorching product, the entry of a tech giant like Apple is likely to spark a wild surge in interest in BNPL, analysts say. Apple’s BNPL product is operated by Mastercard MA,
+0.54%
network and will be available wherever Apple Pay is available. Payments can be managed on the iPhone itself via Apple Wallet.

Prior to Apple’s announcement, over 10% of 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, about half said it was the “only way they could afford their purchase.” BNPL was also more common among people with lower incomes and less education, the Fed said.

The login page of the Afterpay application.

Bloomberg

1. Interest-free installments does not mean that it is cheaper

By splitting a payment into four parts 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 really look at the total cost of ownership,” Ted Rossman, senior industry analyst at CreditCards.com, told MarketWatch. “Don’t just fall into that trap, ‘Oh, it’s only four payments in six weeks – it’s not that bad.’ What is the real 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 an up-and-coming “buy now pay later” service provider.

Getty Images

2. Delaying payments for essential goods can indicate distress

There is also the possibility of unnecessarily deferring payments, particularly for essential items, which could become a patch-ahead for major financial problems.

For example as BNPL operators working with companies that supply essential goods – from gas stations to Super Market – People can consider paying in installments for such services.

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

Especially in this inflationary environment of high gas and food prices, there is a temptation to use BNPL to defer costs.

But if a BNPL user spreads the payments over six weeks, “it just worries me if you can’t afford the gas now,” Rossman said, because “in six weeks you’re going to need more gas… that’s just kind of it.” like you’re standing on your head.”

3. Potential hit for credit score

Missing a BNPL payment cannot incur the same penalties as missing a credit card payment.

Late fees are not essential as of now. However, as credit bureaus are looking into BNPL and considering how to factor it into users’ credit scores, there is a chance that your credit score will be damaged in the near future.

It hasn’t happened yet though TransUnion
TRUE,
+0.33%,
Equifax
EFX,
+0.25%,
and experiential
EXPGY,
-0.93%
are all watching the space to understand how it works and how to integrate it with mainstream credit scores according to their websites.

The Fed’s survey found that most people using BNPL make payments on time. However, late payments were more common among those earning less than $50,000 per year and among those who reported having lower credit scores.

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

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

Photo by Bryan Thomas/Getty Images

4. Good times don’t last forever

Finally, there is a risk of BNPL firms changing course, as offering zero-cost installment loans could become costly – and thus short-lived – in an inflationary environment.

As the world emerges from the dark days of COVID-19, there is a chance that the Federal Reserve will hike interest rates further to control rising US inflation

Rising interest rates have already had an impact on the real estate market and credit cards. If BNPL providers continued to offer free installment loans, consumers could potentially turn to them for larger and riskier purchases that they might not end up paying back in full.

Consider this: Approximately 3.7% of outstanding loan dollars at BNPL operator Affirm AFRM,
+2.02%
were already at least 30 days overdue at the end of March, which corresponds to an increase of 1.4% in the previous year The Wall Street Journal reports. Losses also increased for Affirm and also for Zip, another BNPL player.

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