The Pros and Cons of ‘Buy Now, Pay Later’ Financing for Travel
Last updated June 11, 2021
After more than a year of canceled plans and trips, many Americans are ready to travel again.
So, how do you pay for that highly anticipated getaway if your budget is limited and prices for plane tickets and hotel rooms are going up? The travel industry has a solution: Buy now, pay later (BNPL) financing.
Listen to audio highlights of the story below:
These payment options are available when booking with dozens of travel providers:
- Airline tickets from more than a dozen domestic and foreign airlines, including Allegiant, American, Alaska, Delta, Emirates, Frontier, Hawaiian, Jet Blue, Spirit, Lufthansa, Southwest, and United.
- Travel packages offered by Delta Vacations, Southwest Vacations, and United Vacations.
- Cruises with Carnival, Norwegian, Princess, Royal Caribbean, and Virgin Voyages.
- Vacation rentals through Airbnb, and Vrbo.
- Hotels, such as Universal Orlando, Atlantis in the Bahamas, and the OYO hotel chain.
Many online travel agencies, now have BNPL options, including Expedia, Hotels.com, Hotwire, Kayak, Pleasant Holidays, Priceline, Travelocity, CruisesOnly, SmartCruiser.com, Trip.com, and American Express Vacations.
With BNPL, you get the booking confirmation right away and spread out the cost over a series of equal payments. It can help with cash flow, and it’s an easy work-around for those who don’t have credit cards. But as with all financing options, it’s important to read the fine print.
How It Works
Buy Now, Pay Later programs for retail purchases took off during the pandemic, as millions of Americans switched to online shopping. Many of the companies offering BNPL financing for travel are familiar names from the retail sector: Affirm, Afterpay, FuturePay, Klarna, PayPal, QuadPay, Sezzle, and Splitit. There’s also Uplift, which is exclusively for travel; it reported a 72 percent growth in monthly transaction revenue in the fourth quarter of 2020.
The terms for BNPL travel financing are often different from those for BNPL retail purchases. They tend to be longer—three months to a year or more (rather than four to six weeks)—and they often charge interest. Most lenders affiliated with travel products charge interest rates that can be higher than the APRs most credit cards charge customers with good credit.
“There can definitely be steep interest charges for travel,” warned Ted Rossman, senior industry analyst with CreditCards.com. “Occasionally, a company like Uplift or Affirm will offer zero percent interest for travel, but a lot of the time you are going to be charged an interest rate that’s comparable to a credit card—or even higher. So, you definitely need to do your homework, and figure out what you're getting into.”
For example, we priced a flight on United Airlines costing $2,424. At checkout, we were given the option to use Uplift: Book for no money down, and pay $237.25 a month for 11 months at 15 percent APR. But, there was this disclaimer: “Actual terms are based on your credit score and other factors and may vary.” If our loan was approved, the interest rate could be significantly higher, based on a credit check. Consumers with poor credit scores might pay interest as high as 36 percent.
“If you do get quoted an interest rate other than zero percent, and you have a credit card, consider if it makes sense,” said Annie Millerbernd, personal loans expert at NerdWallet. “Just consider whether you’ll get a lower interest rate through this buy now, pay later loan, or if you can pay less with your credit card.”
Some people are drawn to BNPL financing because it tends to be easier to get approved. Unlike credit card companies, BNPL services often do not report positive payment history to the credit bureaus. So, paying this way may not help build credit. On the other hand, they may report late or missed payments to the credit bureaus, which will have negative consequences.
Not all “pay later” are what they seem. Shop for a flight on American Airlines and at checkout you’ll get offered a “fly now, pay later” option with a no-interest for six months. But there’s a catch: To get the free six-month free financing, you must apply for and get approved for a credit card, and charge the purchase to that card. This is this is a just a way the airline pushes customers to sign up for one of its affiliated credit cards.
Beware the Spending Trap
BNPL is marketed as a smarter, more consumer-friendly way to pay. But these point-of-sale loans can lure you into buying travel products you can’t afford.
BNPL financing differs from paying with a credit card in three significant ways: The payments are the same amount each month; you know upfront how many payments it takes to pay off the balance; and the balance never grows.
“To some, this feels like a more responsible way to take on debt because there’s an end date in sight,” Rossman said. “You know exactly how many payments you have, and how much you owe each month, and it’s not going to change.”
The predictability of BNPL, combined with the lack of fees, is especially appealing to Millennials and Gen Z, industry experts note. Some of the popular BNPL services do not charge a penalty for late payments.
What’s worrisome is that most consumers who sign up for these plans don’t really know how they work. A survey by The Ascent, a service of investment site Motley Fool, found that fewer than half (43 percent) of the 1,800 adults who said they had used a BNPL service completely understood the terms and conditions.
We often warn readers about how retailers manipulate consumers to buy more and buy now—fake sales, hidden fees, misleading scarcity warnings—and now, “pay later” offers.
Consumers are typically far more protective of their savings than they are their future earnings. For some reason, spending money we’ll earn down the road seems less painful than spending money that’s sitting in our checking or savings accounts. BNPL takes advantage of that psychology.
Checkbook frowns on taking out a loan for a nonessential purchase, such as a vacation. It’s best to use money you’ve already saved, rather than committing your future earnings to it.
When you buy now and pay later, you could be tempted to spend more than you can afford on your vacation.
That said, BNPL financing may make sense if you’re offered zero percent interest, and you can afford to make the purchase, but simply want to spread out the payments. It could also be a good option to deal with an emergency that requires travel when you don’t have the money to pay for the trip.
“Just remember, you’re not paying less for that plane ticket or cruise using buy now, pay later; you're paying for it in a different way,” noted NerdWallet’s Millerbernd.
Life happens and plans change. What happens if you need to cancel? Using a third-party financing company adds another layer of complexity should you need to change your vacation dates due to sickness, weather, or a COVID outbreak at your destination. It could slow down your refund or create added hassles. Even if you get a full refund, you may be stuck paying some of the interest you agreed to pay on that loan. Find out when you read the terms and conditions––and find out about cancellations––before signing up.
BNPL services do not provide the same legal protections––especially against fraud––as you get when you pay with credit card. Checkbook often recommends paying with a credit card (when possible) because if there’s a problem after the sale, federal law and credit card company policies allow you to dispute a transaction. In our experience, these “chargeback” requests are overwhelmingly approved. BNPL companies may not be as motivated to make you happy.
When Does Using a Buy Now, Pay Later Service Makes Sense?
Anytime you apply for a loan, you need to think about why you’ve decided to borrow.
“Consider how borrowing will impact your overall financial situation, and why your overall financial situation may be impacting your borrowing options,” cautioned Bruce McClary, senior vice president for communications at the National Foundation for Credit Counseling. “Is this a good time, and is there a good reason to go into debt for this purchase?”
As with all loans, you need to read the fine print to avoid costly surprises. You should also think about why you want the loan. Consider:
Can I make the payments?
If the money coming in varies from month to month, do you really want to add an extra bill into the mix?
What’s the cost of the loan?
How does that interest rate compare to other options, such as your credit card? While some BNPL financing is interest-free, interest rates can be higher than with most credit cards.
What happens if I miss a payment?
While some BNPL services don’t have late payment fees, others do. Will a late payment be reported to the credit bureaus? It could be and that will damage your credit scores.
How does this compare to other options?
Do you have a travel rewards credit card? If you can pay off the bill in full when it arrives, you may be better off going that route. Taking an expensive cruise? Some cruise lines will let you pay in monthly installments—interest free—after you make a deposit.
“There’s a lot of fine print with these offers, and the terms vary widely from company to company,” said CreditCards.com’s Rossman. “It can be confusing and actually a lot more complicated than it might seem on the surface.”
Contributing editor Herb Weisbaum (“The ConsumerMan”) is an Emmy award-winning broadcaster and one of America's top consumer experts. He is also the consumer reporter for KOMO radio in Seattle. You can also find him on Facebook, Twitter, and at ConsumerMan.com.