Christmas is right around the corner and if you haven’t already gone shopping … I’ll pray for you.
If there’s one fact I know, it’s that no one complains when you get more for less. That’s called a steal. But why pay more for the same?
A few months ago, my brother was contemplating buying new boots online, noticed there was a BNLP option, and looked like he just found the last golden ticket. That smile quickly turned into a question mark when he said, “wait a minute. This is not adding up?” He could either buy them in full for $200 or pay four payments for $53.75. He asked me why would anyone voluntarily pay more?
It’s hard to say for sure, but the companies that are extending credit to consumers seem to know that it can be profitable.
Although it’s not a new concept, the financing technique, buy now, pay later (BNLP), has had quite the buzz this year. Especially with some Fintech players in this space going public this year. BNPL is like the child of credit and layaway. Some of you might remember this holiday favorite from stores like Walmart or KMart. You find an item(s) you like but can’t pay it all today. They’ll hold it for you while you make periodic installments until it’s paid off, and finally, they’ll give you your item(s). Credit cards essentially killed this service by the late 2000s. Who wouldn’t want to pay for their new grill over time, just as you would with layaway, but also take it home today?
The problem is, people weren’t just paying off their new grills, couches, and their kid’s XBoxes over a few short weeks. The ability to just pay the minimum payment allowed us to keep kicking the can down the road for a later day. Now, just last year the U.S. owed more than $800B in credit card debt.
BNPL companies are giving us the ability to get the best of both worlds. A forced-closed balance and our coveted items with us sooner than later. Sometimes even interest-free! Although, to me, the biggest benefit is the forced-closed balance.
Two things are at play there.
(1) You must make the final payment, to avoid a hard credit hit.
(2) And there’s this inability to aggregate your debts in one account, separating each debt by merchant; essentially like store credit.
Theoretically, this should force one to be cognizant of their outstanding balances and avoid stacking debt beyond what they can truly afford. This also avoids interest being charged on your entire leftover balance month after month. Creating that snowball effect that ruins people’s lives. That’s how it should work. But, from what we learned from Credit Karma’s September survey, 44% said they had used one (or more) of the BNPL services, and that 34% had failed to meet one or more of their payments.
Only time will tell if this one-two combo can help reduce supply chain issues from inventory back up and alleviate some of the country’s debt problems. The good news, researchers say, “is the average BNPL debt is more than $100, but less than $250.”
Personally, I’m not for or against using the BNPL strategy to fund miscellaneous items. I’ve used it myself. As long as you’re backing it with a debit card, at times, I’d honestly recommend it over a credit card. But understand, there is still an interest rate attached to these payments, and defaults – even on low balances – do exist. It may not always be in your best interest to buy everything on credit.
financing a pizza over 6 weeks: down bad or savvy cash flow management??? pic.twitter.com/obeeBK9pNW
— litquidity (@litcapital) October 15, 2021
If you are done eating that pizza, why are you still paying for it?