How buy now, pay later (BNPL) can finance travel: pros and cons

With more travel expected during the holiday season than last year, more consumers are turning to BNPL (buy now, pay later) services to pay for expenses such as hotels and airline tickets. But while BNPL apps can help your cash flow and save you on interest charged by credit cards, they also have drawbacks to consider.

Buy now, pay later services allow you to make a purchase and then pay for it in several installments, just as you would with a credit card. Its main advantage over credit cards is that there are no interest charges or fees if you pay according to terms.

Consumers are turning to BNPL apps for a number of expenses, including buying Christmas gifts, as they took advantage of shopping discounts on Black Friday and Cyber ​​Monday. The majority of purchases made with BNPL were clothing and personal items such as electronics and jewelry, but according to the Consumer Financial Protection Bureau (CFPB), travel and entertainment are among the fastest growing segments.

From December 23, 2022 to January 2, the AAA estimates that 112.7 million people will travel 50 miles or more, 3.6 million more than the year before. It expects air traffic to increase by 14%, with 7.2 million Americans expected to fly.

Companies like American Airlines and United Airlines work with BNPL providers like Affirm and Uplift so you can pay for your vacations and travel in small increments, which can often result in you paying for your trip after you return home.

Benefits of using BNPL

For consumers with increasingly tight budgets, due in part to inflationary trends and rising interest rates, BNPL apps make it possible to make a purchase and pay it off over time without interest. If BNPL payments fit your budget, this strategy can help you maintain a healthy cash flow so you have more cash on hand to pay for other expenses.

Compared to using credit cards, which charged an average interest rate of 22.12% as of December 2022, according to Investopedia data, BNPL services can save you interest while still giving you a longer repayment time.

BNPL apps are becoming cheaper than using credit cards as credit card interest rates rise. Most credit card companies peg their interest rate to the Federal Reserve’s prime rate, which has risen as the Fed tries to stem inflationary trends. The Fed recently raised its key interest rate by half a percentage point to a range of 4.25% to 4.5%.

Disadvantages of relying on BNPL

When used with careful planning of your budget, BNPL services can be a useful financial tool that helps you make purchases and maintain your cash flow. But they can also cause financial problems if not used correctly.

If you do not make your payments on time, a BNPL service may charge a late payment fee. In fact, late fees are becoming more and more common. About 10.5% of BNPL users were charged a late fee in 2021, up from 7.8% in 2020, the CFPB reports.

Consumer protections for BNPL services are also inconsistent. Unlike credit cards, BNPL services are not regulated in every state. It is therefore possible that they do not provide clear information about the credit costs, for example. BNPL users may be forced to pay automatically or have few rights to dispute charges. Without consumer protection, BNPL services can charge multiple late fees for the same missed payment. The CFPB says it is working to improve regulation for BNPL companies.

“Given their rapid growth, we want to ensure that the buy now, pay later companies are subject to appropriate regulatory scrutiny, as are credit card companies,” CFBP director Rohit Chopra said in a statement.