Mindy McCarthy, VP, Business Development
You’ve probably seen it before. Right as you’re wrapping up your online purchase and getting ready to submit your payment, they tempt you with it.
The “Buy Now, Pay Later” or BNPL payment method is listed as an option right alongside paying with your credit card or Apple Pay. Plus, it’s usually advertised as being interest free with flexible financing…so it must be safe right?
The idea behind buy now, pay later is that consumers can get the things they need immediately—while also getting a little extra time to pay for them.
There certainly is a time and place for BNPL financing – for instance, when its necessary for larger purchases like a new computer for work or school. However, using it frequently on smaller purchases could cause you more of a headache in the long run.
Buy Now Pay Later Vendors
BNPL has exploded in popularity over the last few years and there are many catchy, yet confusing names headlining the companies that offer this payment service.
During your shopping experience you may see a number of them including: Karma, Klarna, Affirm, Afterpay, and Zip.
Buy now, pay later programs aren’t all the same. Each company will have its own terms and conditions, so be sure to know what they are before you checkout.
They all vary slightly in their repayment terms and “benefits”, but remember, when you select one of these names at checkout you’re opting for a BNPL payment option.
How Buy Now Pay Later Works
It generally works like it sounds. You can use a BNPL payment option to immediately get that item you’ve been eyeing, while deferring your payment into small installment payments, sometimes interest free.
Once selected, your item is shipped to you and the cost is split into a payment schedule – typically four fixed payments you make every 2 weeks, though some companies will let you pay the amount in full 30 days later.
BNPL Can Promote Overspending
Backed by vendors slinging phrases like “Powering an economy in which everyone wins,” and “Life’s too short to not get what you love,” buy now, pay later sounds like a win-win for getting the items you want when you want them – now.
What shoppers may not realize, however, is that these payments are preying on the customers’ desire for instant gratification. By taking away the hurdle of paying now and spreading that loss of funds out over time, shoppers are actually at risk of spending more than they normally would or can even afford.
According to a report from LendingTree, 43% of Americans said they have used a BNPL service and of those, 70% admit to overspending when using them.
Shoppers may find that buy now, pay later payments can be hard to track and often lead to missed payments. Was it worth impulse buying that expensive pair of shoes when you add in additional late fees and possibly a damaged credit score?
These services are especially popular with the Gen Z population, specifically young adults ages 18-26. With less credit history and financial management experience, a Gen Z consumer’s financial wellness is at even greater risk when they mismanage or overuse BNPL services.
Additional hazards can arise. From late fees and negative impacts on credit scores from missed payments, to stacking up several installment payments that will come due at once, BNPL can seem like a good idea at the time, but can cause major pitfalls to the long-term health of your finances.
Before you move forward with a buy now, pay later option, ask yourself if the purchase is necessary and is the BNPL method the only way you can afford it? Often, it is better to save for that purchase over the course of a few paychecks. While a BNPL can help you spread out the cost of a necessary purchase, it’s just as likely to make you impulse buy something you don’t need.
About the Author
Mindy McCarthy is a Vice President of Business Development at Waterford Bank, N.A. in Perrysburg, Ohio. She prides herself on working with personal and business customers to fully understand their needs and provide comprehensive solutions to meet them.
Outside of the office, she serves on many local boards and non-profits including the United Way of Wood County, the Toledo Chamber’s Small Business Association, and the Rotary Club of Perrysburg. Would you like to connect with Mindy? Contact us here.