New Trends in “Buy Now, Pay Later”
By Kevin Gibbons
I recently saw an article by Joshua Bote in SFGATE, “'Buy now, pay later' is sending the TikTok generation spiraling into debt, popularized by San Francisco tech firms.” It is a well-written article and I recommend you take the time to read it. In short, the idea is that when you buy something, usually on-line, a service will offer to break the payments up into some number of monthly payments (typically 4) to lessen the immediate impact on your wallet. The concern in the article is that this is in fact an unregulated type of loan, with no credit checks required at the point of sale.
While that is a valid concern, I’d like to look at this subject from a different angle – that of the buyer’s psyche. Let’s look at layaway purchases, traditional credit cards, and in-store credit.
Layaway purchases
A long time ago, people used to buy things on layaway, and you still can. Layaway purchases are a “money-first” reservation system. You make monthly payments on some item. The merchant holds the item until you have paid the full purchase price. Then you get the item. This was a very common way for families to buy furniture and home appliances. Typically, there is a very low or no fee associated with this purchase. Usually, no credit check is required because the merchant is not risking much. They hold onto the item until you have fully paid for it.
The psychological driver in this system is that you don’t get the item until after you have fully paid for it. You know you need to set aside the money for making this payment each month or you may lose what you have paid and not get the item you want and have partially paid for. (Most layaway plans have some sort of default policy, where if you miss a payment, you lose both the item and the money you have already paid.) There is a very strong “carrot” out there to make sure you honor that obligation and don’t over-extend yourself. You don’t get the “reward” until you have completed the contract.
Traditional credit cards
We’re all very familiar with traditional credit cards. You buy something and then take the next 3 months or 3 years paying is off. Everyone knows the dangers and benefits of using credit cards. Your credit limit and interest rate are determined by your credit application, income, credit history, etc. One saving grace is that if you don’t have too many cards, you can easily see how much you are spending each month, and how much you owe by looking at your statement.
Unlike with layaways, you do get the item before you have paid for it. So there is that instant gratification. But there are some constraints, in that your credit limit is restricted based on your credit report, perceived ability to make payments and your credit history.
In-store credit
Some stores will self-finance. Department stores used to issue charge cards. Some still do. These work like standard credit cards but are only good at the specific store. Credit checks and limits are required and fees and interest rates are usually higher than regular credit cards. Like credit cards, you get the item before you have paid for it. Also like credit cards, you have to apply, and the terms are based on your income and credit history. Many people won’t use one unless they really expect they will make a lot of purchase at the specific store over time. It can be hard to see the benefits of the in-store card against a traditional credit card.
How the BNPL System is different and dangerous
As Bote outlines in his article, Buy Now Pay Later lets people take the item immediately while agreeing to make installment payments with no credit check. This is indeed very convenient, but can cause several problems for people down the line:
· No credit check or ability to pay verification is conducted, so a buyer can easily incur debts they cannot pay off.
· The instant gratification of receiving the item immediately can certainly encourage people to spend beyond their means. (This same problem exists with credit cards, but there are limits on credit cards.)
· Each Buy Now Pay Later transaction is independent. You can go to 10 different stores (or sites) in one day and execute 10 BNPL transactions without any limits, or even unifying awareness of what your total obligations may be. Each individual transaction may seem small and manageable, but the accumulation can be overwhelming before you realize it.
· As Bote also states, this entire industry is largely unregulated, so terms and conditions can vary from one provider to the next. When making an instant transaction, very few people take the time to understand all the nuances of their obligations, the payment and default procedures.
Having more options and flexibility to make purchases is a fine idea, but anytime you are acquiring an item or service and obligating yourself to paying for it later, you have to tread carefully. At The Savvy Life, we often talk about “Present You” taking care of “Future You.” Don’t handicap your future self just for the sake of short-term gratification. Read this article to learn how you can avoid The Perils of Retroactive Living.
Kevin Gibbons is a Cash Flow Planning Expert, the Vice President of The Savvy Life and co-author of the international bestseller Living The Savvy Life. For the past ten years, Kevin and Savvy Life Founder Melissa Tosetti have worked with over 700 individuals and families to create Spending Plans.
To learn about how Kevin and Melissa work with clients to create Spending Plans, visit The Savvy Life’s Home Page. If you’d like to learn about how they work with financial advisors and their clients visit: The Savvy Life Advisor’s Page
