Understanding the Risks of 'Buy Now, Pay Later' Options | SavingHunt

Have you been using BNPL services like Afterpay, Affirm, and Klarna? If you appreciate easy returns and buyer protections, you might want to reconsider.

I’ll admit it—I might have gone a bit overboard this past Black Friday and Cyber Monday. I stumbled upon some deals on items I’d wanted for ages and decided to grab them. Surprisingly, it wasn’t the generous discounts that caught my attention (I managed to get 40% off, at most). Nor was it the total amount I spent (I had carefully planned for purchases like the Brooklinen Super Plush Bath Sheets, which are fantastic). What really surprised me was the rise of “Buy Now, Pay Later” (BNPL) services and how my friends are using them without fully understanding what they entail.

What Happened During My Shopping Experience

During my shopping spree, I bought a large Canada Goose coat, which I had heard was the warmest available. Unfortunately, it didn’t fit due to my unusually long arms. When it came time to return it, I found the shipping box was quite damaged, and I didn’t want to use a whole roll of tape to fix it. So, I did what many shoppers do—I returned the item to a physical store.

The Canada Goose employee noticed my struggle as I entered with a massive box crammed into an even larger tote. The exchange went as follows:

Him: “Are you returning something?”

Me: “Yes, and I’m now aware of how heavy these coats are.”

Him: “Please tell me you didn’t use Klarna.”

Me: “Uh, what?”

He explained that if I had used Klarna, I wouldn’t have been able to return the coat in-store. Instead, I would need to take the package back home, initiate the return online, and send it back. Luckily, I had used a traditional credit card, allowing for a smooth return, and I left the store feeling lighter. Yet, I couldn’t shake off the concern for countless shoppers using BNPL without ever reading the fine print.

What I Learned About BNPL

Honestly, my knowledge of these payment options was limited before this holiday season. I understood they let you break down larger online purchases into manageable payments—similar to layaway, but in reverse. You receive the product immediately and pay in installments.

We had discussed BNPL previously, noting that 7 in 10 users have faced interest or fees for missed payments. Additionally, BNPL might encourage overspending—customers tend to make purchases averaging 18% larger because they can “pay later.”

However, my research into return processes revealed a complex landscape.

The Reality of Returning BNPL Purchases

I contacted Klarna, Afterpay, and Affirm to clarify their return policies. They informed me that they do not dictate store return policies; retailers set their own guidelines for returns. While I understand this, it leads to complications.

Retailers decide how BNPL purchases can be returned, and their policies vary significantly. Many require customers to start returns via the BNPL provider’s online portal. For example, Canada Goose’s policy states that orders made with Klarna cannot be returned in-store. The same applies to Ralph Lauren and for Afterpay users at Michael Kors. Some retailers, like Macy’s, allow in-store returns, but you must check your Klarna app for the refund.

Bed Bath & Beyond allows Afterpay returns via mail or in-store. If you opt for in-store, remember to have your Afterpay app ready to activate your card at checkout. Others won’t cancel BNPL payments, but will refund your purchase price to a card of your choice. For instance, at Sephora, your Klarna payment remains intact while you continue to pay until the bill is settled.

It seems that every major retailer has different return instructions. A BNPL customer could face entirely different processes when returning items to multiple stores. Even after successfully navigating those returns, it’s easy to lose track of credits expected to appear on various apps or cards.

“Returns pose a significant challenge with Buy Now, Pay Later. The involvement of a middleman complicates matters,” says Ted Rossman, Senior Industry Analyst. “It’s reminiscent of altering travel plans through an online agency—you typically have to deal with the agency instead of the airline directly, which can be frustrating.”

Moreover, if you change your mind about the items being returned, Klarna's policy states that you cannot modify the return information once submitted. They advise informing the store, as only they can adjust your payment plan. Yet, many retailers redirect customers back to BNPL providers for questions, creating a confusing loop for shoppers trying to return items.

Buyer Protection Concerns

Another downside of using BNPL is the loss of buyer protections typically associated with credit cards. When you use a credit card, you gain the right to dispute a charge if it doesn’t meet your expectations. For instance, you might challenge a charge if the quality doesn’t match what was advertised, or if the product was never delivered. With BNPL services, however, you forfeit these rights, according to Joe Lynyak, a partner at a law firm and expert in consumer protection.

“Dispute rights are crucial consumer protections, but they don’t extend to BNPL transactions. These companies can set their own terms and conditions, which may not favor consumers,” explains Lynyak. “Using a credit card for significant purchases is the best option, as it offers leverage in disputes.”

BNPL Insights and Future Directions

I inquired with Afterpay, Affirm, and Klarna about the return rates among their users compared to those using traditional credit cards. I aimed to determine if these challenges discouraged BNPL users from returning items. Afterpay noted they don’t track return data, but merchants report fewer returns for purchases made through them. Affirm and Klarna didn’t provide data, but the Consumer Financial Protection Bureau (CFPB) recently mandated BNPL companies to compile data on the risks and benefits of their services. “I hope this scrutiny leads to improved return and dispute processes,” says Rossman. We look forward to seeing new data in 2022.

Moving Forward: What Consumers Should Do

BNPL isn’t disappearing anytime soon. Retailers partnering with these services aim to increase consumer spending—hence the average 18% larger orders—and minimize returns.

So, what’s the best approach for consumers?

If possible, use a credit card for purchases and pay it off monthly to earn rewards points or miles. “Credit cards provide the best dispute resolutions and buyer protections,” advises Rossman. “They often come with bonus features like extended warranties and purchase protections at no extra cost.”

Alternatively, consider using a debit card to use your existing funds. If you’re unable to afford a non-essential item right now, it might be wise to hold off on purchasing it.

For significant expenses that you can’t cover in one billing cycle—like a necessary appliance that’s broken—use the credit card with the lowest interest rate and pay it off as soon as possible. In these cases, having the backing of credit card protections is vital.