Buy Now, Pay Later: Smart Move or Financial Trap?
The pandemic changed many things about the way we live, work, and buy. One of the newer ways to make purchases is a recent twist on the old concept of layaway. These days it’s called “buy now, pay later,” or BNPL, but unlike with layaway plans, you can get the item up front and pay it off in installments.
While it may be an answer for those who lack credit or prefer to avoid interest charges on purchases, BILLSHARK wants to caution you that BNPL is not without its own set of problems.
Old concept, new twist
The idea of buying things you don’t have money for goes back decades. In the old-style layaway plans, the store would hold your merchandise and you’d come in weekly, make payments until the item was paid off. Then you could take it home.
Credit cards came along in the ‘60s, offering buyers the chance to get their purchase immediately, and pay it off later. Of course, you’d pay a price for this convenience in the form of (often exorbitant) interest.
In more recent decades, some stores created a version of BNPL, with a plan offering “six-months-same-as-cash” (or 12 months, or 36 months, depending on the price of the item). Furniture and home improvement stores, for example, have been doing this for years. The deal was, pay off the purchase before the time was up, and there’d be no interest charges.
The newer BNPL concept works much the same way, except that the merchandise tends to be less expensive and is geared toward impulse purchases.
Millennials and Gen Z’s have become huge fans of this method, because it’s largely confined to online sales and that’s where they make the bulk of their purchases. Also, younger generations are leery of the hazards of credit card debt and resistant to the accompanying high interest rates.
Satisfaction all around
Buy now, pay later, also called point-of-sale loans, has been around for some time, but it really took off during the coronavirus crisis, when so many turned to ecommerce to shop. In addition, a host of services sprang up to facilitate the BNPL explosion, which grew as much as 200 percent in the last year. An analysis by Bank of America predicts the industry will bring in $1 trillion annually by 2025.
The merchants like it because shoppers tend to spend more when they have a BNPL option. In addition, surveys show that customers tend to be more loyal to retailers that offer it.
Shoppers love it because it’s quick, easy, and often doesn’t even require a credit check to set up payments. Also because there’s no interest involved. And the attraction of paying for this in smaller increments is a big draw for those who are low on cash.
“I don’t have a large income—I make under $30,000 a year—so this allows me to have the things that I want without having to pay a few hundred dollars all at once,” Ysanne Lachtman told The Washington Post. She first used the popular service Afterpay to buy a pair of Quay sunglasses for her sister’s birthday. Since then, she’s made several other purchases that way.
How it works
Each payment system operates slightly differently, but in general it takes only a few seconds to set up.
Usually you give your phone number and date of birth, then provide a credit or debit card to guarantee repayment. As with the old layaway plans, shoppers are often required to pay a certain amount up front, usually 25 percent of the purchase price.
Some services will automatically withdraw the payment from your checking account or put it on your credit card. Others will require a payment every two weeks, and charge a late fee if you don’t make the payment on time.
The financial services that provide BNPL make their money from the merchant, who typically pays them six percent of the purchase amount (three percent is their usual fee on credit card purchases).
There can be drawbacks, however. The most important one is the ease of the program, often allowing people to make impulse purchases they ultimately can’t afford.
Also, much of the industry isn’t regulated, and customers can get burned. They may not be able to return merchandise, or they could end up paying the very interest they were trying to avoid in the first place.
“Consumers don’t always understand how these loan programs work, or what help they can expect if something goes wrong,” says Chuck Bell, a program director with the advocacy division of Consumer Reports (CR). “Buy now pay later programs fall into a regulatory gray area and do not have the same consumer protections as credit cards,” he added.
Buy now, pay later precautions
CR offers the following tips for staying out of trouble.
- Stick to your budget and don’t buy what you can’t afford. You can get into trouble just as easily with BNPL plans as you can with credit cards.
- Make sure you understand all the terms of the loan. Check the FAQ page or call and ask how the loan must be repaid.
- Set up automatic payments. Often buyers have the money to make payments on time, but the terms are so confusing they miss a payment and end up paying a hefty fee.
And to find extra cash, let BILLSHARK’s professional negotiators help lower your bills. We’ll review them for free, and charge only if we can save you money.