Lay away. Credit cards. Installment loans. We’ve been engaging in “buy now, pay later” practices for decades. The latest model actually bears the title. Dubbed as the hottest thing in fintech, start-ups such as Affirm Holdings Inc., Klarna, Afterpay Ltd and even household names including PayPal Holdings Inc. are offering customers the option to spread out the cost of a purchase over smaller, affordable monthly payments.
Millennials and young Gen X shoppers have flocked to buy now, pay later apps with Gen Z not far behind. Are these simply the next innovation in consumer culture? Or should we be worried?
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The knee-jerk reaction to sleek offers of “interest-free” and “no fee” financing is skepticism. Surely there’s a catch.
Generally, when it comes to free services, you are the product — whether it’s your data being used or you’re being directed toward another company. Many buy now, pay later, or BNPL, services have secured partnerships and integrations with big name retailers, such as Amazon.com Inc. and Walmart Inc. Why? Because buy now, pay later tools encourage people to spend.
It’s the same behavioural economics proposition we see with credit cards: You have the ability to make the purchase now, even if you can’t afford it outright. Studies over the decades have demonstrated that those using credit cards are more likely to overspend compared to their cash-using counterparts. (Granted, the connection between overspending and non-tangible currency may change as money becomes more digital.)
In addition to partnerships and integrations, BNPL services may also receive a commission from partner merchants for each sale. And some BNPL models do have loan offerings that charge interest, so it’s important for consumers to understand when interest and fees actually kick in (late payments, for example).
There are certainly positives to the BNPL model. Those who want to make a large purchase without tying up too much cash flow can benefit from the option to pay in installments.
What’s concerning, though, is that these services often aren’t used for high-ticket items. Electronics and clothing/fashion items are the most frequently made purchases using a BNPL service, according to a survey by The Ascent. Affirm’s website, for example, asks if you’re “looking for an outfit that wows.” Afterpay’s boasts fast-fashion company SHEIN, Old Navy and Crocs as some of its most popular categories right now.
It’s not necessarily wrong to spread out the occasional purchase over multiple installments or defer payment for later. But it’s worth questioning the message and integrations aimed at younger generations to buy more of what they might not be able to afford. If these services are here to stay, which seems likely, it’d be wise to consider the most responsible ways to use them.
For those who are going to use a BNPL loan, the behaviours should be the same as proper credit card use. Pay that bill off on time and in full every month. Don’t buy something you couldn’t afford to pay off when the bill is due. Just because you have the access, doesn’t mean you can actually afford the item. Even if the BNPL company says it sends texts and email reminders when a bill is due, you should set up your own to make sure there’s always enough money in your monthly budget to stay on top of your payments.
It probably makes the most sense to use a BNPL service for occasional large-ticket items rather than to fund impulse or lower-cost buys.
Should you plan to use BNPL for multiple purchases in a short timeframe, make sure you’re tracking how much you’ve already allocated of your monthly budget toward those installment loans to avoid overspending. Even if the service says “No Fee” in big letters, be sure to read the fine print and understand what happens after a missed payment and what interest is being levied on your purchase.
One of the biggest warnings: Keep in mind what is financing your BNPL purchase. Should you choose to use a credit card as the payment, you could wind up creating high-interest credit card debt for yourself if you don’t make payments in time. You’d be no better off than if you’d just put everything on the card from the beginning.
Fundamentally, the question becomes, just because you can buy now, pay later — should you? You can only answer that for yourself, but if you have any history of compulsive overspending or credit card misuse, be cautious about the rise of these services.
Erin Lowry is the author of Broke Millennial, Broke Millennial Takes On Investing and Broke Millennial Talks Money: Stories, Scripts and Advice to Navigate Awkward Financial Conversations.