‘Tread carefully': Expert tips for Buy Now, Pay Later shopping plans

No matter how strict we are with our budgets, we’re always tempted to spend a little more this holiday season. With that, people are turning more and more to a popular payment method known as Buy Now, Pay Later to finance their purchases.

While it can be very appealing, is the option right for you?

“You can use it to get a footlong sub for lunch if you want,” said Matt Schulz, chief credit analyst at LendingTree.

Buy Now, Pay Later is a form of short-term financing that offers more flexibility and can be helpful for cash-strapped shoppers. But experts warn it can carry serious financial risks if you’re not careful.

“You have an awful lot of people who are taking out these loans that aren't 100% certain that they can pay them off under the under the terms that they agreed to. And that's a difficult thing,” Schulz said.

These payments can add up fast if people rack up multiple payment plans all at once.

“You can stack them on top of one another and it can end up causing you some issues managing them. And that can be especially troubling when you're new to credit,” Schulz said.

While many payment plans don't charge interest, most charge late fees. Anyone who fails to repay the loan may be sent to a debt collector.

“It's important to understand what the payment schedule is, any fees that may be involved, what may happen if you end up paying late,” Schulz said.

If you’re considering using Buy Now, Pay Later, make sure you treat the plan like a real loan. Schulz said shoppers should avoid big purchases and does not recommend using the payment option to pay for basic needs, like lunch. With more chain restaurants offering this short-term financing, the temptation could be there.

“Buy Now, Pay Later is good for that kind of sweet spot loan where you need a little bit more time than you might have with a credit card, but you don't need so much time there. It'll end up being a lot of pressure for you to pay that loan off in those four installments,” said Schulz. “So, what that exact number is and what that sweet spot looks like differs for everybody and by your budget and what your own financial wiggle room is. But it is important for you to understand that there are consequences if something goes wrong with this loan. So, tread carefully.”

Finally, don’t forget to set up reminders for when your next payment is due. Schulz said it’s good practice for anyone who is new to credit.

“It's certainly good practice for getting in the routine of paying your bills on time and managing those financial costs.”

Here’s another helpful tip: make sure to read the return guidelines, since the process may not be as straightforward as taking it back to the store. Refunds can vary so you want to make sure you’re buying things you won’t regret later.