There are an endless number of ways to borrow money these days, whether you sign up for a credit card, take out a personal loan, or borrow against the equity in your home. However, lenders are always dreaming up new ways to get us to make payments on things we buy. As a result, new payment options that let you buy something now and pay for it later are on the rise.
Buy now, pay later (BNPL) offers are typically interest free, but that doesn't mean they're always a good deal. You may not be paying anything in interest or fees, but you could very well be using this payment flexibility to finance items you don't really need — and should probably pay for in cash.
Case in point:
I was recently comparing cruises with MSC Cruises, a Mediterranean cruise line that offers affordable family vacations throughout Europe, the Caribbean and Mexico, and the Middle East.
I was pretty happy to see that a 7-night cruise in a balcony cabin was just $1,479 per person with an "all in" package that includes free drinks, free wifi, and other perks. However, if you didn’t want to pay up front, you could also pay $130.10 per month for the cruise.
When you click on the offer, it says that interest-free financing is available, which is good news.
The lack of fees and interest is a major plus, but the fact we've gotten to a place where people are setting up payment plans for cruise vacations is not a good sign. It's also troubling that buy now, pay later options have become a pervasive influence in retail and other industries.
The Rise in Buy Now, Pay Later Offers
According to a recent study on buy now, pay later options from Cardify.ai, you're definitely not imagining it if you have seen a lot more flexible payment offers lately. In fact, a July 2020 study on this topic revealed that offers in this realm increased 197% from Q2 of 2019 to Q2 of 2020.
The study notes that the biggest players in this industry — AfterPay, Quadpay, Klarna, and Sezzle — dominate 70% of the market share. And while their services can be "free," keep in mind that these companies are definitely making money. For example, BNPL processors can charge fees to merchants who offer flexible payments, which can drive up the costs of goods and services. Further, BNPL companies charge late fees to consumers when they don't make payments on time.
But, consumers don't always care. And why would they? It's fun to book a cruise or buy a sweater without having to pay the full sticker price upfront.
Savings expert Andrea Woroch has seen this all firsthand, and she says she understands the appeal. After all, BNPL options let consumers make payments on purchases without dealing with a credit card. Many BNPL companies don't charge any interest, and Woroch notes that others like Affirm say they don’t even charge late fees.
When you're in a cash crunch or you're waiting for payday, the allure of monthly payments without interest can be far too much for some people to ignore.
The Problem With Buy Now, Pay Later
Unfortunately, borrowing money never comes without consequences. According to Accredited Financial Counselor® Lauren Bringle of Self Financial, BNPL services may even come with more than their share.
For example, these payment programs are typically used for wants and not for needs, she says. Second, they make tracking your spending considerably more difficult if that's something you're striving for, or if you're sticking to a monthly budget to stay on track with your goals.
BNPL plans also make impulse buying even easier, she says. If you struggle with spending too much on your credit cards, "buy now pay later" could tempt you to rack up even more debt outside of your credit card limits.
Financial advisor and CPA David Peters also points out that small dollar amounts can trick people into spending more than they really should. If you buy something for $360 and spread it out into 12 payments of $30, for example, that sounds more manageable than paying $360 at once.
"Our brain can trick us because we hear a small number and don't think much of it," notes the advisor.
Peters also points out that, just like other types of debt, BNPL options leave you robbing your future self. While it's always best to leave some flexibility in your budget for emergencies that come up, using BNPL plans fills more of your budget up with fixed costs, he says.
If you finance too many purchases, you may even find that a lot of your take-home pay is going toward debt, which can make it harder to get ahead.
Finally, BNPL is still technically a loan. For example, going back to the cruise we discussed earlier, if you miss payments or don’t pay, you will have to deal with the BNPL loan just like any other type of loan. You’ll potentially face late charges, additional interest, and damage to your credit score.
Also, it’s important to note that BNPL loans are handled by a separate company than the merchant you purchased the item through. So, if you cancel your cruise and receive a refund, it’s your job to make sure the refund is applied to your BNPL loan. While some merchants may assist with this, others may not.
The Bottom Line
While payment plans with no interest may seem like free financing, Sandy Yong, author of The Money Master, says consumers need to read the fine print and understand what happens if they miss a payment.
"They could be charged a penalty fee or interest if they are delinquent on their payments," says. "The terms and conditions will vary across different providers, so do your due diligence to understand what you are getting yourself into."
Bringle also says that it can help to consider alternatives to buy now, pay now financing, or to at least create a rule for yourself. For example, you can set a rule that says you have to wait 24 hours before you buy anything.
"After you sleep on it, you may realize the temptation to buy has already passed," she says.
If you pay off your balance each month and avoid interest, you can also consider credit cards that offer rewards.
"Just pay off your balance so you don't carry interest and turn the cost of a shirt into a bigger debt," notes Bringle.
And if your credit isn't good enough to qualify for a rewards credit card, you may want to focus on that aspect of your finance first and foremost.
Finally, you can also strive to save up the cash you need for the things you want the most, even though that's not always fun.
"On the surface, it's great to be able to get what you want without having to save up for it first," says Bringle. "But when it comes to financial health, sometimes waiting to save first is worth it."
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August 17, 2021 at 09:10PM
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The Dangerous Rise Of ‘Buy Now, Pay Later’ Offers - Forbes
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