How Buy Now, Pay Later (BNPL) Can Finance Travel: Pros & 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 expenses such as hotels and airline tickets. But while BNPL apps can help your cash flow and save you on the interest charged by credit cards, they also have disadvantages to consider.

Buy Now, Pay Later services allow you to make a purchase and then pay it back in installments over time, just like you would with a credit card. The main benefit over credit cards is that there are no interest charges or fees if you pay according to the terms.

Consumers are turning to BNPL apps for a range of spending, including holiday gift shopping, as they take advantage of retail discounts on Black Friday and Cyber ​​Monday. The majority of purchases made with BNPL were 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).

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From December 23, 2022 to January 2, AAA estimates that 112.7 million people will drive 50 miles or more, up 3.6 million from 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 trip after you return home.

Advantages of using BNPL

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

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Compared to using credit cards, which charged an average interest rate of 22.12% as of December 2022, according to data from Investopedia, BNPL’s services can save you on interest while providing extended repayment time.

BNPL applications are becoming more advantageous than using credit cards as interest rates on credit cards increase. Most credit card companies tie their interest rate to the Federal Reserve’s prime rate, which has been rising as the Fed tries to stem inflationary trends. Most recently, the Fed raised its interest rate by half a percentage point to a range of 4.25% to 4.5%.

Disadvantages of trusting BNPL

If used with careful budget planning, BNPL services can be a useful financial tool to enable you to make purchases and maintain your cash flow. But they can also cause financial hardship if not used properly.

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 fee in 2021, up from 7.8% in 2020, the CFPB reports.

The consumer protections of BNPL services are also inconsistent. Unlike credit cards, BNPL services are not regulated in all states. So they can, for example, not provide clear information about the cost of credit. BNPL users may be forced to pay automatically or have few rights to dispute the charges. Without consumer protections, BNPL services may charge multiple late fees for the same missed 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 scrutiny, just as credit card companies are,” CFBP director Rohit Chopra said in a statement. communicated

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