If money’s tight, you may find yourself occasionally turning to buy now, pay later (BNPL) plans. They’re undoubtedly convenient. You don’t need a high credit score to use them, and they’re a widespread payment option. If you’re shopping online, there’s a good chance the merchant will have BNPL available.
While these plans make it easier to buy what you want, that’s not necessarily a good thing. And the availability of BNPL has also led to a dangerous trend: loan stacking.
What is loan stacking?
Loan stacking is when you get multiple loans within a short period. It can refer to any type of loan. But it’s most common with BNPL, because these loans are typically easy to get and not reported on your credit history. You could get loans from multiple BNPL services, without any of them knowing about each other.
For example, let’s say you use a BNPL plan to order $200 of clothes online. A week later, you’re buying a gift for a friend’s birthday, and you spend $300 through another BNPL service. And then you need to get a new $500 tablet, so you pay for that the same way.
If you had paid in full upfront for all those purchases, it would’ve cost you $1,000. BNPL plans normally require that you pay 25% upfront. So instead of $1,000, you end up loan stacking. You pay $250 upfront and take on $750 in debt.
The dangers of BNPL and loan stacking
A single BNPL plan on its own isn’t a huge risk. You’ll need to make the payments, so you’ll be tying up money that you could’ve used for your savings or to pay your bills. But as long as you can make your payments, you won’t have any issues.
The real risk is that you get into the habit of using BNPL to make purchases you can’t afford. This is a common issue. People normally don’t use BNPL just once. A report by the Federal Reserve Bank of New York found that most of the consumers who have tried BNPL have used it multiple times.
Among financially fragile consumers who have tried BNPL, 89% have used it multiple times in the past 12 months. Over one-quarter (27%) said they’ve used it 10 or more times.
BNPL provides instant gratification. You get the item you want without needing to wait until you’ve saved enough money. And each time you make a purchase with BNPL, it gets easier to justify doing it again. If you become a frequent user, you’ll by tying up more and more money paying off purchases. If you take on too many BNPL loans, you could even reach the point where you have trouble paying your bills.
You’re better off avoiding BNPL
Instead of making a purchase with BNPL and paying it off over time, try doing the opposite. Set aside money in a savings account every month for the item you want. Once you have enough, then buy it. It may not be as exciting as getting what you want right away, but it’s a good financial habit. If you have trouble finding money to save, consider using a budgeting app to find places where you can tighten up your spending.
Over time, your financial habits make a huge difference in how much you’re able to save and how well you do with money. It’s important to develop good habits and try to avoid bad ones. Using BNPL every now and then might not seem like a big deal, but it can become one of those bad habits that makes it harder to reach your long-term goals.
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