In the post, we will cover the pitfalls of Buy Now, Pay Later financing, but first, here is our disclosure.
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What is Buy Now, Pay Later?
“Buy now, pay later” or BNPL is a financing option that allows you to make a purchase without paying the total amount upfront. Instead, you can choose to split the payment into installments over a period of time. You have the option to select the number of installments and the frequency of payments.
Most popular BNPL apps will charge no interest or fees when you pay off your purchase in four payments. Most require you to make those four payments over six weeks. You also need to be on time with those payments. If you are not, you may have to pay fees and interest charges. They may also restrict the use of their services until you can pay off the debt.
Many BNPL apps also offer longer monthly installment plans, but those tend to come with high-interest rates. These rates can meet or exceed the rates of credit cards. They can be over 30% depending on the item you purchase and the length of the loan.
There are many options available for Buy Now, Pay Later financing. Some popular platforms are Affirm, Afterpay, and Sezzle. Even Apple has gotten in on the action with Apple Pay Later.
Buy Now, Pay Later is an attractive option over paying with credit cards. It is tempting to split purchases up into smaller interest-free payments.
The problem is it is still debt, and BNPL has been shown to cause people to overspend. So, it is a dangerous game to play with your money.
Buy Now, Pay Later Is Still Debt
BNPL plays off of our need for instant gratification. This causes us to make impulse buys that we do not need. That is what bothers me the most about Buy Now, Pay Later. BNPL focuses on financing discretionary, non-essential purchases.
Discretionary purchases are things that you want but do not need. They are the fun things you buy. They are expenses like upgrading your TV or phone, even if your old ones work fine. It is buying another pair of shoes when you have ten good pairs at home. It is spending money on fancy vacations so you can keep up with your friends posting photos on Instagram.
You should only make discretionary purchases if you have the extra money in your budget to do so. You should avoid financing discretionary purchases as much as possible. This includes avoiding Buy Now, Pay Later. It is a recipe for disaster that can lead you further down the dark path of debt.
Do not fall for the trap many BNPL apps push that there are no late fees or no interest charges if you pay in four. If you need to stretch out a non-essential purchase over four payments, then do not buy it. Instead, either forgo the purchase or save the money over the same period and pay for it in full. Do not talk yourself into buying a fun item or trip if you cannot afford it.
Never forget that Buy Now, Pay Later is another fancy word for debt. The only people making money off your spending and debt are the companies and websites pushing BNPL. Not you.
The Other Side of the Coin
Don’t stop reading just yet, assuming this is another post that shames people struggling with debt. It’s not. I’ll be the first to admit that I’m a bit too enthusiastic about money.
When many people start off on their own, they may aim to buy a new car or get a nice apartment. My goal was to be able to retire in my 50s. Almost every financial decision I make is with this goal in mind. Sometimes I have tunnel vision and go too far to reach this goal.
There was a six-year period where I ate peanut butter and jelly sandwiches almost every lunch. When I first got out of college, I moved to one of the most expensive metro areas in the country. Somehow though, I only spent $400 a month renting a room. I also drove a beat-up 5-speed manual pickup truck with no power steering. So I take things to the extreme, which is not always good. People often need to remind me to have fun.
So, I get it. Spending some money on things that are fun is good and healthy. But we all need to balance financial security and enjoying life. Buy Now, Pay Later is not the answer. It is another form of debt that gets you to overspend. No matter how you slice it, overspending and too much debt is bad.
So, I am not here to debt shame. I am just sick and tired of debt being peddled as financial freedom. Buy Now, Pay Later is no different. It is just debt repackaged as financial freedom.
The Rich Get Richer, and The Poor Get Poorer
Buy Now, Pay Later companies need you to spend a lot to make money.
Why?
It is all about the transaction fees.
BNPL companies make most of their money off the transaction fees they charge merchants. It is no different than credit card companies. So they need you to spend a lot to make a lot.
They can also make even more money off of you in fees and interest if you cannot pay on time. Then there are the high-interest rates if you choose a monthly payment plan. I can’t even imagine their cut of the pie from those.
The worst part is that BNPL platforms are preying on the very people they claim to be helping. These people may already be struggling with debt and have low credit scores. They will market themselves as budget-friendly or a path to financial wellness. It is all malarkey. They do not care about you.
They are not here to help you, no matter how they market themselves. BNPL companies do not care about your financial well-being. They only care about growing their bottom line. To do that, Buy Now, Pay Later platforms need you to spend a lot of money. So, they have created all of these marketing gimmicks to make that happen.
The result is the same. They get richer. You get poorer.
Beware of Marketing Gimmicks
I encourage you to dig around one of these Buy Now, Pay Later sites. Look through all the sections, including the ones for their partners. It is all about BNPL platforms teaming up with business partners to get you to spend money.
The most misleading pages on BNPL websites are the “Top Deals” pages. They will make it seem like you are getting an exclusive deal from the businesses they list. You will see discounts like 30% on travel or even 75% on clothing.
What is not to like about that?
You can spread out your payments interest-free with no fees and get an exclusive discount. This is good for your budget. You are coming out ahead.
It is all a marketing gimmick.
Go direct to the websites of the companies offering discounts on your favorite Buy Now, Pay Later platform. They often offer the same discounts to everyone who visits their website. You are not always getting a special deal using Buy Now, Pay Later. It is all a marketing ploy.
When you use Buy Now, Pay Later, both the BNPL company and its partner businesses reap the rewards of your purchases. The BNPL platform promotes its partner businesses, generating sales and revenue for them. In return, the partner businesses promote BNPL services, enabling them to profit from the transaction fees.
BNPL also makes it easy for people to spend since they often do not require hard credit checks for pay-in-four plans. This is just another ploy to get you to use their services. They might not do a hard credit check, but they may report late payments to credit bureaus.
It all creates a win-win situation for them, not you.
Overspending with Buy Now, Pay Later
It turns out their marketing fluff and “special discounts” are very good at getting you to spend money.
According to a Lending Tree buy now, pay later survey, 68% of people say Buy Now, Pay Later services lead them to spend more than if they pay for something upfront.
Let that sink in for a minute.
Almost 70% of people surveyed by Lending Tree are willing to admit BNPL leads them to overspend.
What is even scarier is what people are using BNPL loans for.
According to Lending Tree’s survey, 50% of people who take out BNPL loans use them to buy clothing, followed by technology items and shoes. This reinforces my main concern with Buy Now, Pay Later services. My problem is they encourage overspending on non-essential purchases. Overspending on non-essential items is a surefire way to blow your budget and go broke.
Another eye-opening finding of Lending Tree’s survey is that 42% of Buy Now, Pay Later users have made a late payment. That is a horrible trend. I bet that number will be over 50% in another year or two.
Based on these survey results, how in any way is Buy Now, Pay Later good for your budget and enhancing your financial wellness?
I must sound like a broken record, but the only winners in this game are the BNPL companies and their partners. These companies are wolves in sheep’s clothing. They are debt made to look like financial freedom. They will eat up all of your money if you are not careful.
Actions You Can Take
Here are some actions you can take if you find yourself using BNPL loans.
Recognize Debt Does Not Lead To Financial Freedom
You deserve financial security, and you are capable of reaching that goal. You do not need BNPL loans and the items you buy with them to be happy.
In order to reach financial freedom, you must end the cycle of debt and, with it, the Buy Now, Pay Later loans. Always remember that debt is the enemy of financial freedom. Each dollar allocated towards paying off debt is a dollar that could have been invested to earn more money.
Just Say “No”
If your goal is to achieve financial freedom, then you must learn to say “no.” You must stop using BNPL services. This will be easier said than done.
You have to be willing to forgo instant gratification. You also need to stop worrying about what other people think. This means not keeping up with your friends and their bad spending habits. It means ignoring all their jokes and snide comments. Who cares what they think? This is your life and your financial future at stake. They do not get a vote.
Save, Save, and Save Some More
After you stop using Buy Now, Pay Later services do not start again. Instead, the next time you want to buy something, budget and save for it. Rather than take out a BNPL loan, take the six weeks to save up for the purchase instead. That six weeks will serve as a cooling-off period while you are saving up for the purchase. It will also force you to slow down on the amount of purchases you are making.
I guarantee this will reduce many impulse buys and save you money. You can take that extra money and put it toward an emergency fund or investments. Avoid letting the extra money burn a hole in your pocket. Just because you have it does not mean you should spend it. That will lead you right back into the same situation.
Last But Not Least
Whatever you do, do not shift to credit cards once you stop using Buy Now, Pay Later. The key is to save the total amount for a purchase and not leverage debt. That means avoiding BNPL loans and credit cards to finance discretionary spending.
Do not borrow money to pay for discretionary items. That is what the government does, and it is trillions of dollars in debt. Don’t be like the government. Remember, financing discretionary non-essential purchases is the enemy of financial freedom.
Summing Up Buy Now, Pay Later
Buy Now, Pay Later services can provide convenience, but that convenience can lead to overspending. Overspending leads to debt, and debt can make you broke. Do not get tricked into thinking you are coming out ahead by using BNPL services. The BNPL companies and their partner businesses are the only ones profiting from your spending.
BNPL companies feed off of our need for instant gratification, and our impulse buys. Worse yet, Buy Now, Pay Later preys on people with poor credit by offering them loans with little to no credit checks. The practice is despicable because people will not see their credit scores increase if they pay on time since the loans are not reported to credit bureaus. Yet, BNPL companies will have no problem reporting late payments.
It infuriates me when I see companies profiting off the debt of the very people they claim to be helping.
If you are using Buy Now, Pay Later services, I strongly encourage you to reconsider. You deserve to live without the burden of debt. You deserve financial freedom. Buy Now, Pay Later will not help you achieve that goal.
BNPL is debt disguised as financial freedom.
It is a wolf in sheep’s clothing.
Be vigilant, or Buy Now, Pay Later will gobble up your money.
