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'Buy now, pay later' apps help shoppers finance holiday wishlists

With the holiday season approaching, one in five shoppers plans to 'buy now, pay later.'

TAMPA, Fla. — The holiday shopping season is here, and while you've probably heard of layaway plans, where a store holds an item while you pay it off a little at a time, there’s a shift in the economy where more online financing companies are letting shoppers get their wish list right away and interest-free.

10 Tampa Bay’s Emerald Morrow spoke to NerdWallet’s Annie Millerbernd about the new “buy now, pay later” shopping trend.

Reporter: It used to be that stores would offer layaway plans for those who wanted to pay overtime and get their items once the bill is paid. However, new companies like Affirm, Sezzle, AfterPay, Klarna and even PayPal are doing the reverse: letting consumers get items upfront and pay later, and interest-free.

Annie Millerbernd: In some ways, buy now, pay later (BNPL) is like the new layaway. BNPL is this at-checkout financing option where you go to check out and you get an offer to usually split your purchase into smaller payments. The most common is four, bi-weekly payments. So that day, you'll only pay a quarter of what you owe, and then you'll pay the rest in bi-weekly increments over time.

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Reporter: What are the biggest benefits of BNPL?
Millerbernd: One big benefit of BNPL is it allows you to take a big purchase and make it a lot smaller that day. So, if you're planning to get a special gift for someone that's a little bit outside your budget, this is an option that will make that a more manageable expense for you.

Another benefit is that the BNPL offer is usually interest-free. So, you'll go to check out and see you won't be charged any interest on this purchase if you split it up. And, how often do you encounter an interest-free loan?

[One more] benefit of BNPL is there aren't that many barriers to entry. BNPL companies aren't looking for usually a specific minimum credit score or income. So, if you're a person with a low credit score or thin credit history, this could be a really good option for you to finance a big purchase.

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Reporter: What about drawbacks?
Millerbernd: In terms of a drawback, the biggest drawback with BNPL is it can get a little bit out of hand. You can sometimes overspend. So, if you go to check out and see that large purchase is much smaller, you might feel like you can go and get more and add more to your cart.

So, one way to combat overspending is to start with a list of what you need to buy and stick to that list.

Another drawback with BNPL is that you don't get anything out of it beyond that one purchase. So, unlike a credit card, you're not getting really any credit building, because BNPL companies don't usually report positively to the credit bureaus. You're also not getting any rewards, and you're not getting purchase protection, usually. So, if you order something online and it comes to you damaged, you may not have the same protections that you have with a credit card.

One in five holiday shoppers plans to use BNPL...A really important place to start is with your budget. [Keep] in mind that this is a debt you’re getting still. You still have to repay it even if it is in smaller increments over a longer period.