My first experience with buy now, pay later came when we purchased a Peloton early in the pandemic.
When the time came to pay for the exercise bike, they gave us two options.
Option number one was to pay the full price upfront. Option number two was to pay $60/month for four years at 0% interest.
Obviously, I chose the 0% interest option. It was a no-brainer. Not only is there a time value of money component at work here but it also feels like I’m simply paying a monthly membership for the Peloton.
Even though it’s the same cash outlay over time, buying it this way made it much easier to stomach such a purchase.
Affirm is the name of the company I used for this buy now, pay later purchase.
You may have heard of them after recent partnerships with Walmart and Amazon. The other big BNPL players are Klarna and Afterpay.
And it’s not just bigger purchases like a Peloton where this option is showing up. I’m seeing it everywhere I purchase stuff online, even for less expensive items like clothes or shoes.
Buy now, pay later feels like a concept that came out of nowhere that’s now everywhere you look in online commerce.
At first blush, the concept makes no sense. How can they afford to sell products at 0% interest?
When you dig a little deeper, there is a reason Square paid $29 billion for Afterpay.
For one, credit card companies charge merchants 2-3% on every transaction for the ability to pay by card. BNPL allows merchants to ditch these onerous fees.
Most merchants also don’t really know anything about their customers when they pay with a credit card. With BNPL, companies can better understand their customers. They have more information. They know more about their buying habits. And they have their bank account information.
Another benefit for BNPL companies is they don’t have stringent rules about credit scores like the credit card companies. This allows them to offer payment plans to people who may not even have a credit score (which is estimated to be more than 50 million adults in America).
Some of these people will be paying interest. I’m guessing most merchants are already thinking about how to raise prices to account for the 0% interest option as well.
The idea here is consumers can now buy stuff they may not be able to afford right now by paying off their balance over time.
On the surface, this idea sounds wonderful for consumers.
No egregiously high interest rates like credit cards. No upfront payments for big purchases. Less strenuous credit checks to make a purchase.
For people who are good at budgeting and planning out their finances, BNPL is a wonderful idea.
But I see a lot of potential downsides here.
Yes, people who have their finances in order can essentially game the system by making 0% interest rate installment payments and hold onto their cash for longer.
How about those who aren’t great at budgeting?
BNPL makes sense for consumers if (and it’s a big if) people understand how to budget or have enough disposable income to handle the payments.
I think BNPL could ruin certain people financially if they’re not careful.
If you’re a person who’s not very good at saving up for big purchases, you’re probably not great at budgeting for future payments.
What happens when someone signs themselves up for 17 different BNPL options that they’ll be paying off for years?
This is great if you can’t afford something but what about the fact that you’re essentially spending your future income now?
If people go overboard with BNPL purchases their future finances could become a nightmare.
And BNPL companies have your bank account information. They draw your monthly payment directly from your checking account. It’s much harder to default on those payments if you run into trouble.
Credit cards can be discharged or negotiated down if someone runs into financial ruin. BNPL won’t be nearly as lenient.
My biggest concern here is BNPL will be a fantastic deal for the wealthy and those who generally have their finances together.
It has the potential to wreck the finances of those who don’t.
You know what’s a better idea than buy now, pay later? Save now, buy later.
Call me old fashioned but saving in advance for big purchases offers a much safer path for your future finances.
Installment savings is a wonderful way to plan ahead for a variety of spending needs. Vacations. Car repairs. Christmas presents. Insurance. Furniture. Stuff like that.
I understand why the BNPL option is appealing to consumers. Sometimes it’s much easier to spread out large purchases for certain items.
That’s the whole point of a mortgage — few people can save enough to buy a home with cash.
But going overboard with this stuff and giving yourself a bunch of mini-mortgage payments each month could end up back-firing.
I’m concerned this option is going to cause a lot of financial problems down the line for people who use it too often.
Unfortunately, I think the BNPL model is only going to get bigger from here. I’m actually bullish on BNPL from a growth perspective.
But I’m bearish on the impact it could have on people’s finances in the future when it becomes so simple to buy everything using installment payments.
I don’t like where this is heading.
Further Reading:
How Many Months’ Worth of Spending Do You Need in Your Emergency Fund?
