The Buy Now, Pay Later trend is not new in commerce. It has been around for years, only in different names then. Do payment plans, installment plans, and layaway programs ring a bell? The same concept is applied today, although Buy Now, Pay Later programs are digital and more accessible. Unlike traditional credit methods that take time before approval, these programs are almost instant, with only a soft credit check. Borrowers do not need years of financial credibility to qualify for the loan.
How Does BNPL Work?
BNPLs are essentially no-cost loans that offer payment for purchases for borrowers. When a buyer wants to pay for something online or at the store, BNPL will offer to cover the cost of the item, and the borrower will pay back the money in easy payment installments at no interest rate. The company divides the purchase into smaller installments, mostly fours. The first payment is due at the time of purchase, which means you will be required to pay a quarter of the buying price, whereas the rest of the installments are due every two weeks or a month apart.
BNPL has made access purchases frictionless, and in three steps, you can access check out the items in a cart;
- i) Download the app.
- ii) Link your bank account or card (debit or credit).
- iii) Choose a payment plan.
Because they do not look at the loans the buyer has with other lenders, approval for BNPL purchases only takes minutes. The company will look at address stability, public records, banking information, and the previous history of the borrower with the company.
Are BNPL Programs Really Interest Free?
The simple answer is yes and no. BNPLs do not charge interest on the purchases they pay for. That means the exact amount paid is what you will repay. However, BNPL programs will charge a penalty when a borrower falls behind on payment. These charges only dig one further into the debt they tried avoiding with credit card debt. If you have a bank account or credit or debit card linked, the platform will initiate an automatic overdraw which the bank will counter with a non-sufficient funds charge.
Flexible Payment Plan Or Road To Debt?
The popularity of BNPL services has spread like bush fire during inflationary times; most people are choosing this low-risk, no-cost loan option over the doubling interest rate on credit card debt. This payment strategy has come through for household expenses, grocery shopping, and even emergency purchases for many who lost their jobs during the pandemic and those whose income could no longer cater to the high prices.
There is no doubt that BNPL services are flexible payment plans, but if borrowers are not careful, this in itself could be a problem. Many people consider these small payment installments, but in reality this is the appeal that leads them to spending more. By shrinking the upfront payment, consumers are incentivized to spend more.
BNPL programs have built brand loyalty among young people (Millenials and Gen Z) with little to no credit history. Unfortunately, these younger generations do not understand the implication of unplanned spending. 73% of Gen Z have been reported to spend money on fashion purchases to keep up with trends that only go so far. In the end, most juggle multiple debts with little hope of affording purchases in the future without taking out debt.
Our Two Cents
Buy Now, Pay Later programs sound cheaper, but the reality is this is the exact cost only broken up. Rather than paying $100 on purchases, eighteen-year-old Chiziterem Ogbonna says $25 installment for items from Shein clothing ‘sounds cheaper even though it is not.’ This and the fact that the money does not accumulate interest steers the younger generation away from credit card debt. Without worrying about going beyond their credit limit or paying more than they took, one can easily forget to look at these platforms as money lending platforms.
Many have expressed the sentiment that platforms like Afterpay, Klarna, and Nimble offer a friendly way to purchase things they usually would not. It is less threatening, and many borrowers do not feel like they are in debt. This is a cause for concern because these are still debts and should be considered one. Although low risk, BNPL loans still carry risk. Below are some;
- 1. BNPL is not regulated as traditional lenders; thus, customers are not protected when the purchase gets lost or is damaged during shipping. Thus you will still be expected to pay for the purchase in installment payments.
- 2. When borrowers miss payments, BNPL services can forward the debt to collections which could hurt your credit score; however, on-time payments do nothing to build your credit.
- 3. If the bank account linked to your BNPL account does not have the funds, it could trigger an overdraw. Sometimes, the bank charges you overdraft fees or kicks you out of the system.
- 4. These programs encourage consumer spending, which can easily lead to overspending. If not careful, one could be stuck with an unnecessary purchase instead of directing their money to savings.
How To Regulate BNPL Trend
BNPL programs are not regulated with the same system as traditional lenders like credit cards and installment loans. Although there have been talks about some accomodating thus new credit type by credit bureaus, this has yet to happen. Borrowers need to learn to set limitations on how they use BNPL services to avoid landing in a debt trap. Here are some tips you can use when dealing with BNPL platforms.
1. Plan your spending before time: Borrowers need to plan their spending before time. This will allow them to keep a close eye on what goes and come out of their account and
2. Set a limit for what you take: Evaluate your purchases and know what you can afford. Avoid going beyond what you usually spend to avoid a financial fix.
3. Look at the debts as a whole: BNPL payments tend to stack with each other, and before you know it, the $10 monthly payment turns to $50. For a reality check of the total of your spending, look at these payments as a whole.
Final Thoughts
Whether BNPL is worth hoping in or staying clear comes down to discipline. If BNPL services are your go-to during these inflationary times, it may be worth holding on to. However, if they are a temptation causing you to make large purchases you would not normally do, it may be time to ditch them before they damage your credit score.