The one ‘acceptable scenario for using BNPL during holidays,’ says credit counseling expert

Holiday shopping season is upon us and, for personal finance reporters like ourselves, that means diving into all the different ways Americans are paying for gifts this year.

For a good chunk of shoppers, turns out they plan on paying later. As many as half of holiday shoppers intend to use buy now, pay later services at checkout, per a PayPal survey. While these short-term, often interest-free loans offer convenience and flexibility, financial experts generally don’t recommend them — except in this one instance.

BNPL loans aren’t great because you can face late fees for missing a payment and unpaid debt can still get sent to collections, Bruce McClary, spokesperson at the National Foundation for Credit Counseling (NFCC) points out.

With more than four in 10 (41%) BNPL users paying late in the past year, a LendingTree survey found, this is an all too common risk. Yet, while risks remain, there’s actually an instance where a BNPL loan makes sense.

“I would say an acceptable scenario for using BNPL during holidays, or even throughout the year, is [when] you’re comfortable with the terms of the loan, [you] want to use it during a one-time situation, it fits into your budget and you can repay it at 0% interest and receive perks,” McClary says.

To help you check off these factors that go into the “perfect scenario,” consider the below tips from McClary:

• Read over the BNPL terms since they aren’t universal; what one lender offers may not be what another offers
• Ensure the loan has zero interest, and under what circumstances
• Know any fees for late or missed payments
• Check whether or not BNPL activity will be reported to the credit bureaus
• Math out your repayments; BNPL full repayment is typically four to six weeks
• Stick to a one-off situation, like purchasing a gaming console or a flat-screen TV
• See if you can earn BNPL perks like cash back or rewards

Klarna and Affirm are two of the most well-known names in the BNPL space but, again, they each have their own terms that consumers should be comfortable with before signing on for a short-term loan. For instance, Klarna charges a late fee of up to $7 and interest rates can range from 0% to 35.99% APR. Affirm doesn’t charge late fees, but late payments of more than 30 days past due may be reported to the credit bureaus.

0% APR credit card

BNPL presents a heightened risk of overuse since consumers can open multiple lines of BNPL loans at once and easily fall behind on making payments without the threat of interest accruing. In fact, nearly one in four (23%) BNPL users claim to have had three or more active BNPL loans at the same time, per LendingTree.

An alternative is a 0% APR card that gives you an introductory period of zero interest on all purchases for often a year or longer; you just have to make sure you have a plan to pay off your balance in full before the 0% APR period is up.

The no-annual-fee Wells Fargo Active Cash® Card offers an intro APR for 12 months on new purchases and qualifying balance transfers, plus cardholders earn an unlimited 2% cash rewards on their spending.

Another no-annual-fee card, the Chase Freedom Unlimited® (see rates and fees) has an into APR for a little over a year, 15 months, on new purchases. Cardholders earn 5% cash back on travel purchased through Chase Travel^SM, 3% cash back on drugstore purchases and dining at restaurants, including takeout and eligible delivery service and 1.5% on all other purchases.

Personal loan

If you’re making a much larger purchase and need more money to cover the cost, you could consider a personal loan. Some lenders, like PenFed, let you borrow as little as $600; you can typically borrow as much as $100,000 with other lenders. Repayment terms can range from two to seven years, depending on the lender, and personal loan interest rates are usually lower than credit card interest rates.

Savings

While it may be a little too late to create a sinking fund specifically for holiday shopping this year, remember this tip for next year. Socking away small amounts of money throughout the year will make holiday spending much less financially overwhelming since you’ve already created a pile of dedicated savings to it.

This way, you don’t have to apply for new lines of credit at all. Or, at the very least, the savings can offset the amount of credit you’d need to power through your holiday shopping list.

While BNPL loans can make payments more manageable without charging interest, they shouldn’t become your default way of making purchases. It can be tempting to take out multiple BNPL loans at the same time, and some people may even think of BNPL as an extension of their income.

Don’t use BNPL if you aren’t sure you can make all of the payments on time. BNPL loans are short-term loans and usually need to be repaid fully within four to six weeks.

It’s also generally recommended to not use BNPL on impulse purchases.

At CNBC Select, our mission is to provide our readers with high-quality service journalism and comprehensive consumer advice so they can make informed decisions with their money. Every BNPL article is based on rigorous reporting by our team of expert writers and editors with extensive knowledge of loan products. While CNBC Select earns a commission from affiliate partners on many offers and links, we create all our content without input from our commercial team or any outside third parties, and we pride ourselves on our journalistic standards and ethics.