How Buy Now, Pay Later (BNPL) Can Finance Travel: Pros and Cons

With travel expected to increase this holiday season compared to last year, more consumers are using Buy Now Pay Later (BNPL) services to pay for things like hotels and airline tickets. But while BNPL apps can help with your cash flow and save you the interest charged by credit cards, they also have downsides to consider.

Buy now, pay later The Services allow you to make a purchase and then pay for it in multiple installments over time, just like using a credit card. The main benefit of credit cards is that there are no interest rate charges or fees if you pay according to the terms.

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

From December 23, 2022 to January 2, AAA estimates that 112.7 million people will travel 50 miles or more, 3.6 million more than the previous year. Air travel is expected to increase 14% with 7.2 million Americans expected to fly.

Companies like American Airlines and United Airlines have partnered with BNPL providers like Affirm and Uplift to allow you to pay for your vacation and travel in small increments, which can often result in you paying for your travel after you’ve returned home.

Advantages of using BNPL

For consumers with increasingly tight budgets, due in part to inflation trends and rising interest rates, BNPL’s apps allow you to make a purchase and pay for it over time without interest. If BNPL payments fit into your budget, this strategy can help you maintain healthy cash flow, ensuring you have more cash available to pay for other expenses.

BNPL applications are becoming more advantageous than using credit cards as credit card interest rates rise. Most credit card companies peg your interest rate to the Federal Reserve Prime Rate, which has been rising as the Federal Reserve tries to rein in inflationary trends. More recently, the Federal Reserve raised its key interest rate by half a percentage point to a range of 4.25% to 4.5%.

Disadvantages of relying on BNPL

If used with careful budgeting, BNPL’s services can be a useful financial tool that allows you to make purchases and maintain your cash flow. But they can also cause financial hardship if not used correctly.

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

Consumer protections for BNPL services are also inconsistent. Unlike credit cards, BNPL’s services are not regulated in all states. Therefore, they may not, for example, provide clear information on the cost of credit. BNPL users may be forced to pay automatically or have few rights to dispute charges. Without consumer protections, BNPL services can charge multiple late fees on the same late payment. The CFPB says it is working to improve regulations on BNPL companies.

“Given their rapid growth, we want to ensure that buy-now-pay-later companies are subject to appropriate supervisory reviews, just like credit card companies,” CFBP Director Rohit Chopra said in a statement. .