Yes, you can buy now and pay later, but should you?


  • By Erin Lowry / Bloomberg Opinion

Keep. Credit cards. Installment loans. We have been engaging in “buy now, pay later” practices for decades. The latest model actually bears the title. Dubbed the hottest thing in fintech, startups like Affirm Holdings Inc, Klarna, Afterpay Ltd, and even household names including PayPal Holdings Inc offer customers the option to spread the cost of a purchase into smaller, more affordable monthly payments. .

Millennials and young Gen X shoppers have flocked to buy apps now and pay later, and Gen Z is not far behind. Are these simply the next innovation in consumer culture? Or should we be worried?

My knee-jerk reaction to fancy “interest-free” and “no-fee” financing offers is skepticism. There is surely a catch.

Photo: Bloomberg

In general, when it comes to free services, you are the product, whether your data is used or directed to another company. Many buy now, pay later, or BNPL services have secured partnerships and integrations with reputable retailers, such as Amazon.com Inc, Walmart Inc, Macy’s Inc, and Bed, Bath & Beyond Inc. Why? Because buy now, pay later, tools encourage people to spend.

It’s the same behavioral economics proposition that 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 shown that credit card users are more likely to overspend compared to their cash-using counterparts. Of course, the connection between overspending and non-tangible currency could 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. Some BNPL models have loan offers that charge interest, so it is important for consumers to understand when interest and fees come into play.

Certainly, there are positives to the BNPL model. Those who want to make a large purchase without locking up too much cash flow can benefit from the option to pay in installments. A friend of mine mentioned using buy now, pay later to buy a crib. Could I have paid in advance? Yes. Did you want to fork out $ 1,200 at once when you had a lot of other expenses? No.

However, the worrying thing is that these services are often not used for high-priced items. Electronics and clothing / fashion items are the most frequently made purchases using a BNPL service, according to an Ascent survey. Affirm’s website, for example, asks if you’re “looking for an outfit that captivates.” Afterpay’s features fast-fashion company Shein, Old Navy, and Crocs as some of its most popular categories right now.

It is not necessarily wrong to distribute the occasional purchase in several installments or to defer payment for later.

However, it is worth questioning the message and integrations aimed at younger generations to buy more than they may not be able to afford.

If these services are here to stay, which seems likely, it would be wise to consider the most responsible ways to use them.

For those who are going to use a BNPL loan, the behaviors should be the same as for the proper use of the credit card. Pay that bill on time and in full every month. Don’t buy something you can’t afford when the bill is due. Just because you have access doesn’t mean you can actually pay for the item.

Even if a BNPL company says it sends text messages and email reminders when an invoice is due, you should set up your own to ensure that there is always enough money in your monthly budget to keep track of your payments.

It probably makes more sense to use a BNPL service for high-value occasional items rather than funding impulse or lower-cost purchases.

If you plan to use BNPL for multiple purchases in a short period of time, make sure you are tracking how much of your monthly budget you have already allocated to those installment loans to avoid overspending.

Even if the service says “no charge” in large print, be sure to read the fine print and understand what happens after a late payment and what interest is charged on your purchase.

One of the biggest caveats: be aware of what you are financing your BNPL purchase. If you choose to use a credit card as payment, you could end up creating high-interest credit card debt if you don’t make payments on time. It would be no better than if you had put everything on the card from scratch.

Basically the question is, 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, beware of increasing these services.

Erin Lowry is the author of Broke Millennial, Broke Millennial bets on investing and Broke Millennial Talks Money: Stories, Scripts, and Tips for Navigating Awkward Financial Conversations.

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

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