Lay away. 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, 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?
My knee-jerk reaction to sleek offers of “interest-free” and “no fee” financing is skepticism. Surely there is a catch.
Generally, when it comes to free services, you are the product — whether it is your data being used or you are 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, Walmart Inc, Macy’s Inc and Bed, Bath & Beyond Inc. Why? Because buy now, pay later tools encourage people to spend.
It is the same behavioral economics proposition we see with credit cards: You have the ability to make the purchase now, even if you cannot afford it outright. Studies over the decades have demonstrated that those using credit cards are more likely to overspend compared with their cash-using counterparts. Granted, the connection between overspending and non-tangible currency might change as money becomes more digital.
In addition to partnerships and integrations, BNPL services might also receive a commission from partner merchants for each sale. Some BNPL models do have loan offerings that charge interest, so it is important for consumers to understand when interest and fees kick in.
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. A friend of mine mentioned using buy now, pay later to buy a crib. Could she have paid up front? Yes. Did she want to shell out US$1,200 in one go when she had lots of other expenses? Nope.
What is concerning, though, is that these services often are not 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 Web site, for example, asks if you are “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 is not necessarily wrong to spread out the occasional purchase over multiple installments or defer payment for later.
However, it is 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 proper credit card use. Pay that bill off on time and in full every month. Do not buy something you could not afford to pay off when the bill is due. Just because you have the access, does not mean you can actually afford the item.
Even if a BNPL company says it sends texts and e-mail reminders when a bill is due, you should set up your own to make sure there is 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 are tracking how much you have 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 do not make payments in time. You would be no better off than if you had 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.
This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.
JPMorgan Chase & Co chief executive officer Jamie Dimon on Tuesday quipped that his company is likely to outlast the Chinese Communist Party (CCP), while reiterating the bank’s commitment to the country in wide-ranging comments that also touched on Taiwan, free speech and former US president Donald Trump. “We hope to be there [in China] for a long time,” Dimon told a panel discussion at the Boston College Chief Executives Club. Relaying a “joke” he made during a recent visit to Hong Kong, he said “The communist party is celebrating its 100th year. So is JPMorgan. And I’ll make you a
PharmaEssentia Corp (藥華醫藥) shares have jumped 80.56 percent since the company obtained a US polycythemia vera (PV) drug license for its new interferon drug Besremi (ropeginterferon alfa-2b-njft) on Nov. 12. Shares on Friday closed at NT$195 in Taipei trading, up from the stock’s closing price of NT$108 on Nov. 12. PV is a rare, chronic and life-threatening blood cancer linked to a stem cell mutation in the bone marrow that results in an overproduction of blood cells and places sufferers at risk of having a blood clot, stroke or heart attack. PharmaEssentia is preparing to make Besremi available in the US in the
The Kaohsiung City Government yesterday said it would impose a property hoarding tax as it is seeking to contain speculation in the real-estate market, calling recent price increases “abnormal.” The announcement came in support of the Ministry of Finance’s call for local governments to levy a high tax rate on people with more than one property. Ministry officials on Tuesday discussed strategies to rein in speculation with the nation’s six special municipalities, as well as the Hsinchu city and county governments. About 84,000 out of 1.06 million housing units in Kaohsiung are not residential property, the city government said in a
BOOST EXPECTED: Higher market prices would offset effects of the industry’s transition to more climate-friendly production methods, a company official said China Steel Corp (CSC, 中鋼) expects steel demand to increase on the back of governments around the world subsidizing infrastructure construction amid a stabilizing COVID-19 pandemic, CSC chairman Wong Chao-tung (翁朝棟) told an investors’ meeting yesterday. “After getting through the hard times, I foresee at least one year, very possibly two years, of strong steel market,” Wong said. Calling a dip in steel prices a “short respite for the market,” Wong said that it would likely bounce back early next year on the back of mild winter temperatures around the world allowing construction activity. Despite COVID-19 spikes in some regions and increased