Buy Now, Pay Later: What Could Go Wrong?
It’s debt – and another way to encourage overspending
Record numbers of Americans are embracing buy now, pay later (BNPL) deals, which pop up when you hit the checkout page while online shopping. These short-term, zero-interest loans, which let you chunk payments over six weeks or so, can indeed be a better deal than the 16% interest charged on your credit card’s unpaid balance.
But BNPL plans can end up costing plenty.
Welcome to the insta point-of-sale loan
Layaway plans, where you make a deposit on an item to reserve it until you can cough up the entire purchase price, are oh-so-20th century. Today you can do just the opposite. At the point of sale, an algorithm runs at lightning speed and decides if you qualify for a BNPL deal. If you get the green light, you will pay just 25% of the cost of an item, and it’s yours, right then and there. All you need to do is agree to pay off the rest — typically in three more equal payments every two weeks. Pay on time and there’s no interest charged.
For example, rather than have the $200 cost for those new sneakers hit your credit card immediately, with a typical BNPL you agree to use your debit card to pay $50 immediately, and then another $50 every two weeks, effectively stretching your purchase over six weeks total.
On our way to BNPL Nation?
The online shopping boost during the pandemic has been a boon for the BNPL industry.
A poll of 2,000 Americans in March reported more than half have bought something with a BNPL loan, up from less than 38% in July 2020. While younger consumers are, not surprisingly, eager early adopters — more than 60% have used BNPL— oldsters are getting in on the game, too. More than 40% of shoppers over age 54 had used BNPL in the March poll, double the percentage back in July.
PayPal jumped into BNPLs last year with its Pay in 4 plan. Other major third-party BNPL services include Afterpay, Klarna, QuadPay and Sezzle. Not all retailers offer the service, and typically there are set spending limits of less than $1,000.
Affirm offers a slightly different model. Payments are monthly, and can be chunked out over more than a year. If its algorithm deems you a fantastic credit risk, you may get an interest-free loan, but given the longer term offers, Affirm charges interest to some customers, on some purchases. The top interest rate can be 30%.
No interest – unless you miss a payment
Here are the real costs to consider:
Spending more. Retailers are willing to pay the BNPL services stiff fees on the bet that consumers who only pay 25% upfront at the point of sale will buy more stuff. A survey last year by Cardify.ai found that almost half of consumers who used a BNPL loan said they spent more than if they had been shopping with a credit card. Affirm’s website coos, “It’s About Helping You Say Yes.” In the six months through the end of 2020, 27% of Affirm’s revenue came from financing short-term loans to Peloton customers.
Opportunity cost. Every time you say yes to any purchase, those are dollars you don’t have for other goals, such as retirement savings, or perhaps paying down the credit card you didn’t want to use for the item. It’s not Affirm’s job, or any of the BNPL servicers’ jobs, to be your financial planner. But their entire business model is built around making instant gratification easier. And that comes at a cost to your long-term financial well-being.
Late fees. Miss a payment and many of the big BNPL issuers will hit you with a fee of $7 to $10 or so. That’s per purchase, and it can be levied every week you miss a payment, though there is typically a cap on your maximum late-fee charge. But keep in mind, this is not like a credit card bill where one late fee is charged per month. For example, if you are late on four different BNPL purchases, you could be looking at four late fees.
A CreditKarma/Qualtrics poll in March found that 40% of BNPL users have indeed missed at least one payment in the past year. Clearly, no interest isn’t always no added cost.