The Dangers of Buy Now, Pay Later

We’ve all been there. You open an online browser, head to a retailer, add items to your cart, and when it comes time to pay – you’re tempted by the colorful “buy now, pay later” (BNPL) option, conveniently placed right above your credit card information. Even some brick and mortar retailers now provide it. 

Essentially, it’s like taking out a loan specifically for that purchase. It’s the modern day version of layaway.  

Vendors that provide this service, like Afterpay, Affirm and Klarna are exploding in popularity. According to a survey conducted by The Ascent in March 2021, 55.8% of consumers said they have used a buy now, pay later service, up from 37.65% in July of 2020 – an increase of almost 50% in less than one year.

How Do Afterpay, Affirm and Other Buy Now, Pay Later Vendors Make Profits?

A common question is: If BNPL platforms are charging 0% interest, how do they make money? Even though they advertise 0% interest, only 43% of the loans issued are actually 0% APR. Loans can be issued at anywhere from 0-30%, and the actual interest rate you are charged depends on their agreement with the merchant and your creditworthiness.

They also have a steady revenue stream from the retailer. It’s thought that the retailer pays 2-4% to vendors like Afterpay, Affirm and Klarna. The retailer doesn’t mind paying the percentage, because the short-term financing option tends to encourage consumers to make larger and more frequent purchases.

Here is a breakdown comparison of Afterpay vs Affirm, if you’re given the choice at checkout.

How Does Buy Now, Pay Later Differ From Layaway?

The biggest difference between BNPL and Layaway is that when you utilize a BNPL loan, you actually leave the store with the product. With traditional layaway, you don’t receive the product until all of the payments have been made.

How Does Buy Now, Pay Later Differ From a Credit Card?

Unlike a credit card, the terms of the financing with BNPL are tied to the specific purchase – you’re financing an individual purchase, and you’ll have terms of repayment specific to that item. The loan is independent of any other spending on a credit card, or other items that you use BNPL for.

Credit cards will probably be next to offer the BNPL option. Interestingly enough, the same survey conducted by The Ascent found that 62% of buy now, pay later users think the service could replace their credit cards, though only about a quarter want that to happen.

Why Is Buy Now, Pay Later So Tempting to Use?

Well, for one: It’s a new, interesting and trending product. And the vendors are great at advertising their services. 

There is also a stigma that credit cards are bad, and BNPL is not a credit card. Some vendors don’t even check credit, so it may be an exciting option for people who don’t qualify for a credit card.

People love holding on to cash, and using the service is easy to justify – especially if you pay 0% APR. I see people hold on to cash only to pay interest on larger loans, like house mortgages, lines of credit and student loans. Now you can take the money you would’ve spent on your purchase and use it to buy cryptocurrency or meme stocks… Affirm is actually beginning to allow consumers to purchase cryptocurrency on their platform.

What’s Dangerous About Buy Now, Pay Later?

It’s important to check the terms and conditions of each of these loans before you actually use them, which is not easy to do if you’re at an in-store register making a quick decision. And as it turns out, the terms and conditions can be far worse than credit cards – everything from higher interest rates, to how your credit score will be impacted if you miss a payment.

BNPL makes impulse buying even easier. When people see that a large purchase can be broken up into small monthly payments, people are sometimes “tricked” into making the purchase. As such, many use short-term financing for wants and not needs. It’s easy to make a lot of these purchases which, in turn, can blow up your budget and spending.  

If you use the BNPL tool responsibly to purchase things that you can afford at 0% interest, it’s not such a bad thing. But there is a hidden danger to using it that can have an impact on your finances.