Over the last several years, it seems like “Buy Now, Pay Later” has become one of the fastest growing payment methods in the world. Whether you’re shopping for clothes, electronics, concert tickets or even groceries, you’ve probably seen the option at check out before: “Pay in 4 easy installments.”
At first glance, it sounds like a win-win situation. Instead of paying $200 today, you can split the purchase into four payments of $50 spread over several weeks.
On the consumer side, it makes big purchases feel more affordable.
On the business side, it encourages customers to spend more money. It seems like everyone could be benefiting.
However, as with many financial products, what sounds simple on the surface is much more complicated underneath.
The idea for Buy Now, Pay Later may feel like a modern idea, but the concept itself is not new at all. For decades, consumers have financed large purchases through loans, installment plans, and credit agreements.
The difference is that these financial options were exclusively reserved for major purchases or necessities. A family might finance a car because they needed transportation to work, or take out a mortgage because purchasing a home outright is unrealistic (especially nowadays).
In these cases, borrowing was often viewed as a tool to obtain something essential that would otherwise be inaccessible.
Today, Buy Now, Pay Later has expanded far beyond those traditional uses.
Consumers can now finance a pair of shoes, concert tickets, a video game console, or even a meal at a restaurant. The ability to divide almost any purchase into smaller payments has transformed borrowing from an occasional financial decision to an everyday shopping feature.
It is also very important to include that some less common “BNPL plans” that are available for things like game consoles, are structured to be more like renting the item. Once you have finished your payments, you are required to return the item.
To fully understand why BNPL has become so popular, it is important to understand the psychology behind it:
Imagine Consumer A walks into a store and sees a jacket priced at $200. If the only option is to pay the full amount today, they must decide whether the jacket is worth sacrificing $200 from their bank account for right now.
However, If they are offered the option to pay in four installments of $50, the purchase suddenly feels much less expensive, even though the total cost remains exactly the same (if payments are made on time).
This psychological effect is the primary reason retailers are eager to offer BNPL options (and why we made the conscious decision not to include it). Numerous studies have found that consumers tend to spend more when installment payments are available.
A shopper who originally intended to spend $100 will suddenly feel comfortable spending much more because the immediate financial impact appears smaller.
Supporters of Buy Now, Pay Later often point out that many, if not most, of these plans for small purchases are interest-free. This sounds harmless, but the reality is that interest free debt is still debt.
Now let's imagine Consumer B, who purchases a new laptop for $800 using a BNPL plan of four payments of $200. If that consumer already has $800 saved up for this purchase and just chose to spread it out over 4 months, it is relatively harmless. However, if the purchase is made with insufficient savings, this is where problems arise.
If the payment time comes and Consumer B doesn’t have the funds, late fees, penalties or restrictions on future borrowing, are all possibilities. Now, what initially seemed like a convenient payment option has quickly become a source of financial stress. This risk is exacerbated when multiple BNPL plans begin to stack on top of one another.
Unlike a single large purchase that takes a significant amount of consideration, a plethora of small purchases using BNPL can quickly and quietly accumulate in the background. What feels affordable at the time of each purchase can become overwhelming when all of the payments are due at once.
Before selecting Buy Now, Pay Later as an option, you should ask yourself, “Can I afford this purchase without stress if I were to pay for it 100% upfront?”
If the answer is no, don’t make the purchase at all, and if the answer is yes, just make the full payment up front anyways. BNPL plans were initially reserved, and should stay reserved for big, necessary purchases that most people can’t realistically afford to pay for upfront.