4 things to consider before using 'buy now, pay later' for your holiday shopping

You probably want to get a head start on holiday shopping this year, but you might not know how you're going to finance these purchases months in advance. Increasingly, shoppers are turning to 'buy now, pay later' loans to pay for everything from exercise bikes to bedding because the financial product allows customers to split up the cost of their purchases into installment payments typically due every two weeks. 

In fact, a survey from Affirm found that 56% of people were interested in using BNPL to fund their holiday shopping. Retailers — including Amazon, Walmart and Target — have caught on to the trend and in recent months, have announced partnerships with BNPL providers including Affirm, Sezzle and Zip.

While BNPL, also known as point-of-sale loans, might sound like a good choice for holiday spending because it allows you to split up the cost of your purchases over time, you should use them with caution. Below, CNBC Select outlines four things to keep in mind before you start using BNPL to fund your holiday shopping spree.

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Savvy consumers might be smart about their BNPL usage and only sign up for one when they know they have enough money to pay off the balance. However, it's easy for consumers to overspend when using a POS loan: One LendingTree study found that two-thirds of consumers using a BNPL loan said they spend more than they would have if they had to pay for their purchase up front. 

Retailers like BNPL because it encourages consumers to spend more. Afterpay boasts that order values are 20% to 30% higher when consumers use its service over other payment methods like debit, credit or cash. 

While there isn't yet published research on the psychological impact BNPL can have on spending, Sachin Banker, an assistant professor of marketing at the University of Utah, says that consumers could be prone to making the same mistakes with BNPL loans that they are with credit cards. 

"At a psychological level, people overspend with credit cards in part because credit cards allow people to separate consumption from payment," he says. "In other words, you can get the item immediately but don't actually need to think hard about costs until you [get] a complicated bill later, which has everything lumped together."

Baker believes that payment methods, like credit cards and BNPL loans, promote overspending by making costs less salient to consumers. In other words, when consumers receive a bill a long time after they make a purchase or when those bills are hard to interpret, they might end up spending more at checkout because they don't understand the true cost of their purchases until later.

Since BNPL loans typically only require people to pay a down payment for their purchase up front, it can be easy to forget about the other installment payments or be tempted to spend money on products that you can't actually afford.

If you really need to use a BNPL loan to finance that FitBit you're buying your dad for Christmas, you should have a clear idea of how much each installment payment will be, when each payment is due, the interest rate on the loan and whether you can afford the total value of the good.

BNPL loans are appealing to consumers with lower credit scores because they offer a lot of the same perks as a credit card without requiring a good credit score. Some BNPL providers, such as Afterpay, don't perform credit checks at all, and others, like Affirm, only perform soft credit checks.

Even so, you should be cautious about the effect these loans could have on your credit report because some BNPL loans can decrease your score regardless of whether you're paying them off on time and in full. 

Here's why: Every BNPL loan that you take out is considered a separate account on your credit report. When you take out a short-term loan and then pay it off, you're closing one account and therefore decreasing the average age of your credit history. Since the length of your credit history (which is made up of the average age of your accounts, the age of your oldest account and how long it's been since you opened an account) makes up 15% of your FICO score, using multiple BNPL loans and closing them could have a dramatic negative impact on your credit score.

In order to avoid this, you'll want to opt for a BNPL loan that doesn't report to the credit bureaus. For example, Afterpay only offers one product: A six-week BNPL option with 0% interest, and it does not report to the credit bureaus. 

Before you sign up for a BNPL loan, do your research and see if the company is going to run a credit check and if it reports to the bureaus, especially if you're taking out a longer-term loan that charges interest.

Since BNPL loans are a relatively new financing method, there are fewer government regulations and consumer protections in place than there are for credit or debit cards. Most of the major BNPL providers like Klarna, Affirm and Afterpay have their own dispute protection and return policies, but it can be confusing for consumers to understand which companies they need to contact in the process. 

For returns or issues with a product purchased with a BNPL loan, consumers should typically first contact the merchant. Oftentimes, the merchant will resolve the issue, and the BNPL provider will refund the consumer after the return has been processed by the merchant. 

However, some BNPL providers require you to continue making payments on your purchase until the return has been processed. Klarna, Affirm and Afterpay allow customers to delay payments in some cases. Klarna will allow you to pause payments if you report an issue with an order, and Afterpay will allow you push the original payment due date by two weeks until the return has been processed.

If you have an issue with the quality of a good, things can get more complicated but generally you should reach out to the retailer first, and then the BNPL provider and the credit or debit card issuer you used to finance your purchase if you can't resolve the issue. 

If you're not sure about the reputation of a retailer that you're purchasing from, or think you might need to return something you purchased, it might be smarter to pay for your purchase using a credit card. Cards like the Blue Cash Preferred® Card from American Express offer return protection*, so cardholders who have issues with a retailer not accepting their return up to 90 days from purchase can be reimbursed for up to $300 per item and up to $1,000 per year per account if purchased entirely with your eligible American Express® Card. Purchases must be made in the U.S. or its territories.(terms apply).

* Eligibility and Benefit level varies by Card. Terms, Conditions and Limitations Apply. Please visit americanexpress.com/benefitsguide for more details.

For consumers who want a longer period of time to pay off their purchases, a 0% APR credit card could be better choice than a BNPL loan. While most BNPL providers — like Affirm, Klarna, Zip, Afterpay and Sezzle — offer 0% APR loans, they typically have a repayment term of just six weeks. (Note: Affirm does have long-term 0% loans with certain retailers, but these require a hard credit inquiry in order to be approved.) With 0% APR credit cards, customers don't have to pay interest if they revolve their balance during the first six to 21 months of card membership.

Many 0% APR credit cards also give customers the opportunity to earn rewards. So if you're spending big during holiday season, you could earn some extra cash by meeting a spending limit and pocketing the welcome bonus or by earning cash back on your purchases. Furthermore, credit cards can give a better opportunity of building your credit score if you're paying your balance on time each month. (With a 0% APR card, you'll still need to pay at least the minimum each month.)

The Wells Fargo Active Cash® Card offers new cardholders a $200 cash rewards bonus after you spend $500 in purchases in the first three months of card membership, and you can get a 0% intro APR for 12 months from account opening on purchases and qualifying balance transfers. 18.49%, 24.49%, or 28.49% variable APR thereafter; balance transfers made within 120 days qualify for the intro rate and fee of 3% then a BT fee of up to 5%, min: $5.

Another good option if you want cash back on all of your purchases is the Chase Freedom Unlimited® (see rates and fees), which has a 15-month 0% introductory APR period then 18.24% - 27.74% APR variable on new purchases.

If you choose to get a 0% APR card, make sure to keep track of when the 0% APR period ends as you don't want to wind up paying any interest on your holiday purchases. Ideally, you use it like a BNPL loan, paying it off a bit each month.

And since credit cards can also make consumers prone to overspending, make sure you have a clear idea of what you're purchasing and how much you're spending so you're not surprised when the bill arrives.

When it comes to holiday shopping this year, it might be tempting to use a BNPL loan to finance the purchases you're buying in advance. While BNPL loans are convenient and easy to use, you should be reading the fine print before you sign up.

Holiday shopping can cause many people to overspend, so the the first thing you should be aware of when using BNPL loans is whether you can afford the item you're purchasing. You should also be paying close attention to a provider's return policy, whether they report to credit bureaus and their interest rates and late fees.

For rates and fees for the Blue Cash Preferred® Card from American Express, click here