Yes, you can buy fashion now, pay later. But should you?
Lie down. Credit cards. Installment Loans. We have had “buy now, pay later” practices for decades. The latest model actually bears the title. Startups like Affirm Holdings Inc., Klarna, Afterpay Ltd, and even well-known names like PayPal Holdings Inc., dubbed the fintech hottest thing, are offering their customers the option of reducing the cost of a purchase on smaller, affordable monthly payments too to distribute .
Millennials and young Gen X shoppers are flocking to buy now and later to pay for Gen Z apps that are not far behind. Are these just the next innovations in consumer culture? Or should we worry?
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The knee-jerk reaction to sleek “interest-free” and “fee-free” financing offers is skeptical. There is sure to be a catch.
In general, with free services, you are the product – regardless of whether your data is used or you are forwarded to another company. Many buy now, pay later, or BNPL services have secured partnerships and integrations with well-known retailers such as Amazon.com Inc. and Walmart Inc. Why? Because buy now, pay later Tools encourage people to spend money.
It’s the same behavioral statement that we see with credit cards: you have the option to make the purchase now, even if you can’t directly afford it. Studies over the decades have shown that those who use credit cards are more likely to overpay when compared to their cash counterparts. (Granted, the relationship between overspending and intangible currency can change as money becomes more digital.)
In addition to partnerships and integrations, BNPL services can also receive a commission from partner dealers for every sale. And some BNPL models have loan offers that charge interest. It is therefore important for consumers to understand when interest and fees are actually incurred (e.g. late payments).
The BNPL model certainly also has positive aspects. If you want to make a large purchase without tying up too much cash flow, you can benefit from the option of paying in installments.
What is worrying, however, is that these services are often not used for high-priced items. According to a survey by The Ascent, electronics and clothing / fashion are the most common purchases made through a BNPL service. For example, on Affirm’s website you will be asked whether you are “looking for an outfit that inspires”. Afterpay’s currently counts the fast fashion companies SHEIN, Old Navy and Crocs among the most popular categories.
It is not necessarily wrong to split the occasional purchase into several installments or to defer payment until later. But it’s worth questioning the message and integrations targeting younger generations to buy more of what they may not be able to afford. If these services persist, which is likely, it is wise to consider the most responsible ways of using them.
For those looking to use a BNPL loan, the behavior should be similar to that of using a credit card properly. Pay this bill on time and in full every month. Don’t buy anything you can’t afford when the bill is due. Just because you have access doesn’t mean you can actually afford the item. Even if the BNPL company says they send SMS and email reminders when a bill is due, consider setting up your own to make sure your monthly budget always has enough money to keep track of your payments .
It probably makes the most sense to use a BNPL service for the occasional high volume item, rather than funding impulse purchases or cheaper purchases.
If you plan to use BNPL to make multiple purchases in a short period of time, make sure you keep track of how much of your monthly budget you have already set aside for these installment loans to avoid over-spending. Even if the service says “No Charge” in large letters, be sure to read the fine print and understand what happens if you miss a payment and what interest will be charged on your purchase.
One of the biggest warnings, remember what is funding your BNPL purchase. Should you choose to use a credit card as payment, you could create yourself high-interest credit card debt if you fail to make payments on time. You wouldn’t be better off than writing everything on the card from the start.
Basically, just because you can buy now, pay later – should you? You can only answer that for yourself, but if you have obsessively overpayed or misused credit cards in the past, be careful with the rise in these services.
Erin Lowry is the author of Broke Millennial, Broke Millennial Accepts Investments, and Broke Millennial Talks About Money: Stories, Scripts, and Advice for Having Uncomfortable Financial Conversations.
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