Law #16: Don’t use Buy Now, Pay Later again until you read this
The Law
As with any shiny new financial object, think long and hard about the best way to use Buy Now, Pay Later (BNPL) programs. Master their terms and conditions, learn the best ways to use them, and leverage them to your benefit. Be careful not to allow temptation and instant gratification to overcome you. Remember, uber-savvy, well-paid, genius-level marketers and strategists are on the other side of the enticing ads you see compelling you to spend more and more frequently with BNPL. Master these programs just like the financial world has taught everyone to master and be careful with credit cards—the same pitfalls befall unwitting BNPL shoppers.
Your Keys to Power
Understand the players. First, develop a deep understanding of the players in the BNPL market. Here’s a brief overview of the major players:
Affirm
Pros - No late fees, make purchases online or in-store, choose your preferred payment schedule
Cons - Some transactions charge interest, transactions may require a credit check
Interest-free options - Interest rates range from 0% to 30%, and it’s not clearly defined when 0% interest applies
Late payment penalty - No late fee for missed payments
Klarna
Pros - Can be used wherever credit cards are accepted, single-use card numbers provide enhanced security, zero interest and fees with on-time payments
Cons - Purchases must be approved individually
Interest-free options - Pay in 4 and Pay in 30 are interest-free, but with monthly financing, interest ranges from 0% to 24.99%
Late payment penalty - $7-$35 for missed payments depending on the payment plan you choose
Afterpay
Pros - Provides reminders to help keep you from missing payments, zero fees with on-time payments
Cons - Late fees can go as high as 25% of the total order amount, each purchase requires approval
Interest-free options - Your purchase will be divided into four equal payments, with the first due at checkout and the remaining three payments due two weeks apart, and there is no interest
Late payment penalty - $8 if a payment is missed by 10 days
Zip
Pros - Available anywhere Visa is accepted, pay with your debit or credit card, generate a virtual Zip card to use in stores, no hard credit check
Cons - Customer approval details are unknown, charges a convenience fee for payments, late fees apply to missed payments
Interest-free options - Purchases will be split into four equal installments to be paid every two weeks, with the first due at checkout, but with a $1 fee per payment that is essentially interest, Zip doesn’t really have an interest-free option
Late payment penalty - Late fees vary by state and could be $5, $7, or $10
PayPal
Pros - PayPal Purchase Protection applies to purchases, PayPal is widely familiar and is accepted at millions of online merchants, interest-free payments
Cons - Pay in 4 plan isn't available for in-store use, each purchase must be individually approved, not available in all 50 states
Interest-free options - Purchases will be divided into four equal installments due two weeks apart, with the first payment due at checkout, and there is no interest
Late payment penalty - There are no late fees
Sezzle
Pros - No interest on purchases, you can adjust payment schedules up to two weeks later, use online and in stores
Cons - Adjusting or rescheduling payments more than once will incur a fee, you’ll pay 25% down, each payment needs to be rescheduled individually
Interest-free options - Purchases will be divided into four equal installments due two weeks apart, with the first payment due at checkout, and there is no interest
Late payment penalty - There are no late fees, however, if you miss a payment, Sezzle will deactivate your account, and you’ll need to pay $10 to reactivate it
Care Credit
Pros - There aren’t any membership fees, you can qualify with fair credit, available at more than 225,000 health care providers in the US, payments reported to credit agencies
Cons - Annual percentage rates are high if you end up paying interest, no loyalty points or rewards
Interest-free options - Care Credit offers deferred interest options depending on the merchant, where each merchant can select the programs they want to offer. These deferred interest programs mean you won’t pay any interest if you pay the total in full within 6, 12, 18, or 24 months. But be careful with deferred interest, which isn’t really the same as zero interest. With deferred interest, if you don’t pay the full balance within the deferred interest window, Care Credit will charge you interest from the original purchase date.
Late payment penalty - Up to $41
Best ways to use.
Essential items only. If you need to use BNPL, focus on essential items like a mattress, a set of pots and pans for a new apartment, or a computer you need to get revenue-generating work done. Focusing on essential items and, whenever possible, revenue-generating ones will allow you to keep spending under control. And remember, when making these purchases, strive to keep them within your means. Don’t increase your shopping cart just because you have a pay later option.
Take advantage of interest-free options, but only buy what you can afford to pay for in cash. Paying something off in installments without interest can be a great financial strategy as long as you’re buying things within your means. Just like with credit cards, use these options wisely and only purchase items you could afford to buy with cash. Combining this strategy with only buying essential items is the best way to steer clear of the pitfalls of BNPL options.
Avoid interest. For smaller purchases like these, do everything you can to avoid interest. Many BNPL options offer interest-free payments, so you should be able to find a program that will allow you to pick up your items without interest expense. If you get offers for BNPL that involve interest, avoid them.
Opt for shorter-term repayment plans. Short repayment plans like four payments spread over a few weeks may be safer than more extended plans over several months. Particularly in a volatile economy, commit to repaying things as quickly as possible to avoid the risk of future changes that you may not be able to predict.
Use credit reporting to your benefit. Using credit helps your credit profile only when payment history is reported to the major credit bureaus. Select options whenever possible that report positive payment history to the credit bureaus. And remember, avoid missing payments or skipping out on the debt altogether. While BNPL companies don’t often report positive payment history, almost all report negative payment history.
Pitfalls to avoid.
Nonessential items. Items like excessive fast fashion additions to your wardrobe are not essential purchases. They also are certainly not revenue-generating purchases. In fact, those types of items will likely hit your wardrobe, touch your body 5 to 20 times, and then we head for a dumpster and then a landfill where they'll wreak havoc on the environment for the next decade or more. Avoid BNPL for ongoing nonessential expenses like these.
The infamous inflated shopping cart. BNPL companies report an increase of 50-200% in units per transaction and an increase of 30-50% in average ticket size just because the shopper is using a BNPL program. Don’t do this. Shop as if you are paying cash today to avoid inflating your shopping cart.
Late payment penalties. Never overextend and end up in a situation where you can’t make a payment. Opt for shorter payments, keep it within your means, and only purchase essential items to help you to keep up with payments. Late fees can be costly.
Negative credit reporting. Missing payments or skipping out on debt altogether could result in the account being reported on your credit file, which can cause significant damage to your score and report.
Frequent use. Activating a new BNPL purchase plan several times a month is probably not a winning strategy. Investigate your purchases over the last 12 months, and be critical of future purchases. Ask yourself if you really need the item, if it is essential, and if it is worth investing in if it is not essential.
Be careful of a hard credit pull. Pay attention to the terms and conditions of offers from BNPL companies at checkout. Before you apply, you’ll see a notice that lets you know whether the purchase option requires a hard pull of your credit. Check this resource to understand the difference between a soft and a hard credit pull. Hard credit pulls can bring your score down, so you want to avoid these, particularly on BNPL purchases that are not absolutely essential.
Stacking BNPL debt. Engaging multiple BNPL loans from numerous service providers at once could land you in financial trouble. Although some service providers offer methods to help you avoid overextending yourself, you forgo those protections when you stack loans across multiple service providers. If you're not savvy with your budget and spend beyond your means, this could be a sure-fire way of ending up in significant debt you can't pay when bills come due.
Practical Application
Avoid BNPL if you’re already struggling to pay your bills. If you’re facing everyday struggles keeping up with critical bills like rent, utilities, mortgage payments, student loan payments, tax debts, etc., or if you already have mounting credit card debt you need to address, BNPL is not for you. At least not right now. Avoid at all costs.
Accept that this is still debt from a company that needs to turn a profit. With BNPL, you're working with a creditor offering you a loan that makes it "debt." Unpaid debts can wreak havoc on your life through the potential exposure to lawsuits from creditors and adverse credit reporting that can impact your financial future for at least seven years. Amassing significant debt could force you to the brink of bankruptcy, which can affect your financial future for 10 years. While it's justifiable for companies to make a profit, understand what those profit-driven motivations can mean for you as you utilize these options. Klarna amassed $700 million in losses last year, 65% resulting from people defaulting on loan payments. In the previous 12 months of that reporting, Affirm lost almost the same amount yet tripled marketing expenses to $427 million. These companies’ profit goals depend on consumers extending (even overextending) themselves to make payments while continuing to buy more and more items using BNPL to generate revenue. This certainly doesn’t mean that one should vilify or demonize these payment options, but take heed of their economic situation and don’t fall victim to a vicious cycle of BNPL debt-purchasing of nonessential items just because savvy companies entice you through great marketing to put yourself into desperate situations to mitigate their own desperate positions of needing to generate profitable revenue.
Mind your credit report. As with any credit or financing option, you want to be very careful with your credit report. First and foremost, to get approved, you want to know if you will have your credit checked. If there is no credit check, this part of the process won't impact your credit report or score. If your credit will be checked, you want to know if it will be a hard or soft pull. You want a soft pull that won't impact your credit score, not hard pulls that can lower your credit score temporarily. Of course, a hard pull on your credit report from time to time is OK, but you wouldn't want to do that for a one-time purchase of a small item like what you’d typically buy with a BNPL loan.
Choose a credit card when it’s better. Sometimes, using a credit card is better, particularly if you use it wisely. Using credit cards to purchase items you can pay off in a single statement cycle means you won't pay interest, and you'll help develop a history of on-time payments, which will help you gain approvals for items in the future like car loans or leases, apartments or mortgages, and personal loans. Credit cards may also offer rewards or cash back bonuses, perks that are not popular with BNPL companies.
Define “essential” reasonably and stick to it. Remember, the key to a successful BNPL strategy is to focus on essential rather than nonessential items. To do that, logically define what "essential" means and stick to that understanding. That's to say, don't get caught up in redefining words based on the day's wants. For instance, you've been invited to a themed birthday party, and you redefine "essential" to include a brand new Kardashian-inspired dress. That's probably not essential, even if it feels like it at the moment because you really want to go to this party.
Authority
"So the possibility is that you could, in your mind, think of everything that you're buying in those four installments and, as a result, take on more debt than you would if you had to pay for them in full each and every time. The opportunity to stack your debt by using multiple Buy Now, Pay Later loans through multiple service providers is one of the biggest risks I see.” - Terri R. Bradford, a research specialist in payment systems for the Kansas City Federal Reserve
“We can pay now to prevent or we can pay later to treat.” - Martin J. Blaser
“When a person's debt increases a lot, at first he will feel he wants to pay it all back, later he will think, 'Why give back?' That spoils from within. We should not sign from within.” - Dada Bhagwan
"If you stop at general math, you're only going to make general math money." - Snoop Dogg
“A man who pays his bills on time is soon forgotten.” - Oscar Wilde
“Beware of little expenses; a small leak will sink a great ship.” - Benjamin Franklin
Our Vote
As with most financial tools, used carefully, BNPL can have tremendous benefits. I have used this type of payment option about half a dozen times, but always for essential purchases, except once when I purchased a couple of pairs of shoes.
Each time, I’ve had the total amount of the entire purchase available in my liquid checking account, and therefore, I’ve only used BNPL options to give up as little cash upfront as possible. Using BNPL this way meant I preserved cash flow and kept my bank account balances higher while paying for purchases over time. I did this because I preferred to hold the cash in my account for as long as possible, earning whatever interest the bank paid, considering that BNPL financing did not cost me any interest or fees. If BNPL would’ve cost me fees or interest, I would’ve purchased with a credit card that I would've paid in full at the following statement cycle, which would've avoided interest. At any rate, I was never at risk of defaulting because I only purchased items I could have paid for in cash immediately. So even though the BNPL creditor removed money from my checking account every two weeks, it wasn’t because I was waiting on a paycheck to deposit first.
When I financed BNPL with Care Credit, I felt freer to spend higher sums on healthcare for one of my pets and two of my aging family members that I support, just like others report when using BNPL. Through the lens of this particular program, I best comprehend the potential pitfalls of BNPL for some shoppers. Even though Care Credit allowed, even enticed, me to spend more freely, I still ultimately kept it within my means. Therefore, I had no issues paying the lump sum due within the six-month deferred interest period to avoid getting hit with interest on the entire purchase. With Care Credit specifically, as it’s primarily for health expenses, I caution anyone to be especially careful regarding emergency healthcare. Emotions can get the best of us when we make those decisions under stress and emotional difficulty.
Reversal
It’s critical to understand the different types of payment options that are available to you. There is beauty in having access to sources of credit and financing. But having the opportunity doesn’t automatically mean it makes sense to utilize the option. If you use BNPL, it benefits you to understand the program deeply and have a tremendous understanding of how to keep expenses under control. If you have trouble with bills or overspending, it is wise to avoid BNPL, create a savings fund for emergencies, and work toward paying cash for the things you need, at least for a while.