Go away. Credit card. Installment loans. We have adopted “buy now, pay later” practices for decades. The latest model actually bears the title. Dubbed the hottest thing in fintech, start-ups like Affirm Holdings Inc., Klarna, Afterpay Ltd, and even well-known names like PayPal Holdings Inc. are offering customers the ability to spread the cost of a purchase on smaller and affordable monthly payments. .
Millennials and young Gen X shoppers have flocked to buy now and pay later for apps with Gen Z not far behind. Is this just the next innovation in consumer culture? Or should we be worried?
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The knee-jerk reaction to elegant offers of “interest-free” and “no-charge” financing is skepticism. There is surely a catch.
Typically, when it comes to free services, you are the product, whether your data is used or you are directed to another business. Lots of Buy It Now, Pay Later, or BNPL services have partnerships and integrations with major retailers, such as Amazon.com Inc. and Walmart Inc. Why? Because buying now, paying later, tools encourage people to spend.
It’s the same behavioral economics proposition that we see with credit cards: you have the option to make the purchase now, even if you can’t afford it. Studies over the decades have shown that those who use credit cards are more likely to spend more than their counterparts who use cash. (Granted, the link between overspending and intangible money may change as money becomes more digital.)
In addition to partnerships and integrations, BNPL services can also earn a commission from partner merchants for each sale. And some BNPL models have loan offers that charge interest, so it’s important for consumers to know when interest and fees actually kick in (late payments, for example).
There are certainly some positives to the BNPL model. Those who want to make a large purchase without committing too much cash may benefit from the option of paying in installments.
What is concerning, however, is that these services are often not used for big ticket items. Electronics and clothing / fashion are the most common purchases made through a BNPL service, according to a survey by The Ascent. The Affirm website, for example, asks if you’re looking for an outfit that impresses. Afterpay’s claims fast fashion company SHEIN, Old Navy and Crocs among its most popular categories right now.
It doesn’t necessarily hurt to spread the occasional purchase over several installments or to postpone the payment until 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 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 a good use of the credit card. Pay this bill on time and in full every month. Don’t buy something you couldn’t afford to pay when the bill is due. Just because you have access doesn’t mean you can actually afford the article. Even though the BNPL company says it sends SMS and email reminders when an invoice is due, you need to set up yours to make sure there is always enough money in your monthly budget to stay on top of your payments.
It probably makes more sense to use a BNPL service for occasional high-priced items rather than funding impulse or low-cost purchases.
If you plan to use BNPL for multiple purchases in a short period of time, be sure to track how much you have already allocated from your monthly budget for these installment loans to avoid overspending. Even though the service says “No Fees” in large print, make sure you read the fine print and understand what happens after a missed payment and what interest is charged on your purchase.
One of the biggest caveats: keep in mind what funds your BNPL purchase. If you choose to use a credit card as your payment method, you could end up with high interest credit card debt if you don’t make payments on time. You wouldn’t be better off if you put everything on the map from the start.
Basically the question becomes, just because you can buy now, pay later – should you? You can only answer on your own, but if you have a history of compulsive overspending or misuse of your credit card, be cautious about increasing these services.
Erin Lowry is the author of Broke Millennial, Broke Millennial Is Going Into Investing, and Broke Millennial Talks About Money: Stories, Scripts, and Tips for Navigating Sensitive Financial Conversations.
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