Buy Now, Pay Later

Buy Now, Pay Later (BNPL) is a short-term financing option, essentially a mini-loan allowing you to break up your purchase into multiple installments, with a 0% interest rate. Typically, you pay the first installment at the point of purchase, and then your payment method is set up to autopay the remaining installments.  

BNPL has become increasingly popular in recent years, particularly for online purchases. As it is a newer product, there is less awareness of the pros and cons, as compared to more traditional lending options, like credit cards. It’s particularly attractive for consumers who are trying to avoid traditional consumer debt. Because of how it is marketed and the 0% interest rate, many consumers don’t FEEL like they are taking out a loan, or acquiring debt when they use them. However, BNPL is in fact a loan and comes with many of the potential pitfalls of other types of consumer debt. 

The Appeal of Buy Now, Pay Later

BNPL’s main draw is that it reduces the amount you need to pay at the time of purchase. If you have the option to pay full price, or 25% of the price, paying less now is understandably attractive. It leaves you with more money in your bank account or may even allow you to make a larger purchase than planned. Of course, you know you will still have to pay the rest eventually, but we tend to assume that we will be in a better position to make those payments in the future. You rationalize that you’ve got a paycheck next week, so you’ll surely have the money when the next payment is due.

Another major benefit is the 0% interest. Assuming you pay all of the BNPL installments on time, this option is cheaper than using an interest-bearing credit card and paying it off over the same time period. Zero is a powerful number. When we see that something is “free” we are compelled to take advantage of it, even if it wasn’t something we wanted or needed. We often overlook the potential costs hidden in seemingly free offers.

Cost

When you make the initial purchase, you also set up autopayment for the subsequent installments. For most people, there aren’t any fees or direct costs. However, according to a report from the Consumer Financial Protection Bureau (CFPB), about 10% of users do experience late payment fees. Often this is because they don’t have sufficient funds in their account at the time of the autopay installments. Late fees are usually around $7 per late payment. While most users manage to avoid these fees, it is definitely something to watch out for, as many people forget about the autopayments and may be surprised when it is deducted from their accounts.

Returning Purchases

The ease of buying with BNPL can prompt consumers to skim past the fine print. One particular complication is when they want to return something purchased through BNPL. Once you’ve returned the item, the merchant has to process your return, notify the BNPL lender, and then the lender has to process it. This can easily take a few weeks. Meanwhile, you may be continuing to pay installments on an item you’ve already returned. 

Credit Report Impact

At the moment, BNPL lenders rarely report consumer data on their 0% APR products to Credit Bureaus. If they are reporting to the credit bureaus, it’s usually because the customer is delinquent, and the debt has been sold to a collection agency. By not reporting the positive data (customers with consistent on-time payments), those customers miss out on the potential to build their positive credit history, the way that on-time credit card payments do.

Permission to Overspend 

The biggest concern with the BNPL is that it encourages consumers to overspend. During the checkout process, you are repeatedly shown the price of the down payment, while the total cost is downplayed. You are likely still aware of the total cost, but your brain tends to focus on that lower amount you are paying upfront. It tricks your brain into thinking you are actually spending less. 

When considering what they can afford on future purchases, many people rely on what intuitively feels like an appropriate amount to spend. Let’s say that for you, spending about $25 a month on beauty products feels appropriate. You are shopping online for a product or two, and suddenly you have $100 worth of items in your cart. That feels like more than you should spend, but oh wait, here’s an offer to just pay $25 now. OK, 4 payments of $25, that’s manageable. 

Now you’ve committed your future self to these payments. Present-you loves this plan, you get $100 with of products (and the dopamine hit that comes with it), yet still feels like you stayed within your plan of spending $25.  

But future-you is stuck paying the three remaining $25 installments, without the dopamine hit of a new purchase. By the next month, you are itching to buy something new, and so you spend $25 on a new product (again, you’ve decided a $25/month purchase is reasonable), completely forgetting that you’ve got another autopay deduction scheduled. BNPL can lead to a dangerous cycle of overspending and deferring payments for your future self to deal with. 

By committing yourself to future payments, you limit the options and opportunities of your future self. It also makes it really challenging to save for the future when you are locked into paying for past purchases.

How BNPL is Marketed to Retailers

Of course, not ALL consumers will be swayed to spend more, just because they are using BNPL. However, it’s interesting to note that, according to the report from the Consumer Financial Protection Bureau, when BNPL companies are pitching their service to retailers, they claim that customers using their BNPL services have anywhere from a 40-85%  higher Average Order Value (AOV) than customers using other payment methods. Essentially, customers who use BNPL are adding more to their carts. 

Takeaway

There’s nothing inherently wrong with using BNPL. If it means you can get your needs met without the interest fees of a credit card, great.  But keep in mind that retailers aren’t offering BNPL as a benefit to you, they are offering it as a way to encourage you to buy something that otherwise felt out of reach, or to buy more than you initially planned. 

If you can’t afford to pay for it in full today, take a moment to consider if you can really afford the installment payments. And is that how future you will WANT to spend that money?

If you find yourself consistently spending more than you planned, schedule a call with Sarah. There are a lot of emotional connections to money and how we spend it. Unpacking what triggers you to spend more can make it much easier to find financial strategies that will be effective for you.