The concept of Buy Now, Pay Later (BNPL) is nothing new. To the older generation, BNPL is essentially what they called the “installment plan” or “layaway plan” with a modern twist. Think of the infomercials on late night TV where you can get a niche item for “3 easy payments of $29.99”. Fast forward to present day, BNPL providers are virtually everywhere online. An article from Breeze noted that 74% of poll participants have indicated that they have used BNPL to purchase something in the past year1. Some of the biggest providers out there who have infiltrated the retail market are Klarna, Afterpay, and Affirm. Even big banks, like Chase, American Express, and Citi, are trying to grab their share of the $100 billion BNPL industry. Today we'll go over how BNPL works, its benefits, and dangers/risks to see if it's something you might consider.
How It Works
When shopping online with a number of retailers, buyers will notice an extra button during check out which will allow them to opt to use a BNPL service. Buyers typically pay the first instalment at that exact moment and will get invoiced for the remaining payments during a period they so choose. Options range from 3 to 12 months. Keep in mind, this service is not free. If the buyer chooses to go with BNPL, they will pay interest and/or fee on each monthly instalment for the duration on the plan.
Benefits
There are a number or benefits when using BNPL which makes them very marketable and popular, especially with millennials and gen Z.
1. BNPL limits strain on cash flow.
It may not be feasible to pay for large ticket items at any given moment. With BNPL services, you can control when you spend your money and how much you spend depending on the plan you choose. You can then use use your extra cash flow for other things such as groceries and other bills.
2. BNPL allows buyers to avoid overloading existing credit lines.
If you’ve read our team’s other blog posts on credit cards, you know that credit utilization is a major factor in calculating credit scores. The goal is to shoot for a lower credit utilization ratio. However, when a large ticket item threatens to put you over that utilization ratio, BNPL can help break the bill into smaller instalments and keep you under that ratio.
Dangers/Risks
On the opposite side of the spectrum, there are a couple of dangers/risks that buyers can face when using BNPL services.
CNBC published an article citing, “One of the main criticisms of BNPL is that it could encourage shoppers to spend more than they can afford.”2 This actually correlates very well with Breeze’s article, as they also state that 57% of BNPL users said the service has caused them to spend above their means (i.e. buying things they normally couldn’t afford upfront).
Another danger is the risk of missing a payment. In a recent survey, Credit Karma found that 34% of those who have used BNPL services, have fallen behind on one or more payments. Of those who admitted to having missed at least one payment, 72% said they believe their credit score declined as a result of missing the payment(s), with 31% of those saying their credit score declined significantly.3 For those who are looking to buy a home or car soon, credit scores make a huge difference that can lead to either paying or saving thousands of dollars in interest. With Americans buying more and more, we know that this can hinder their finances not only in the short term (3-12 months), but also long term (the entire financial plan).
Personal Story
On a more personal side, BNPL has helped me and my own finances.
Back in March, an unexpected expense came up regarding my car. Both of my drive axels were due for a change since they were worn out after driving a total of 93,000 miles within the 7 years I’ve owned my car. The total bill for parts, labor, and other routine maintenances came out to $1,676.47. This is a large bill to put on my credit card. Since this would take a large chunk of my $3000 liquid savings, I opted to use Chase’s “My Chase Plan4” to break up the installments throughout a 6-month time frame. The new monthly instalments, instead of paying all at once when my billing cycle closes, came out to $288.85 per month, which is much more manageable. By the end of the payments, I will only pay a total of $56.58 in fees for this plan. Although I will have to pay $56.58 more than the original bill, it allowed me to keep my liquid savings available for any other unexpected expenses and to have cash on hand for any buying opportunities that might present itself in the stock market.
If you are having a hard time deciding whether a purchase is worth it, ask yourself these questions:
Does this purchase fit into my budget?
Will this affect my life in a positive or negative way?
What other things could I use the money for that could be more beneficial?
If you are having a hard time answering the questions above, I highly encourage you to set a meeting with Tori or Alex to go over them.
Best,
Brandon
- https://www.meetbreeze.com/blog/buy-now-pay-later-personal-finance-study/
- https://www.cnbc.com/2021/09/21/how-buy-now-pay-later-became-a-100-billion-industry.html
- https://www.creditkarma.com/about/commentary/buy-now-pay-later-surges-throughout-pandemic-consumers-credit-takes-a-hit
- https://www.chase.com/personal/credit-cards/mychaseplan-hub