Risks of "Buy Now Pay Later" Apps

When you’re shopping online and about to check out, there are usually two forms of payment to choose from: Credit/Debit or Paypal. These two forms of payment require you to pay the full amount of your order. However, in recent years, a third form of payment has become a popular alternative: “Buy Now, Pay Later”. With this payment option, customers can delay their payments or pay by splitting their order into weekly or monthly installments. Buy Now, Pay Later (BNPL) payment options are extremely helpful when you don’t quite have enough money to pay the full amount right now, but you know you’ll be able to afford the weekly or monthly installments. Evidently, the risks of the BNPL option arise for this same reason.

Companies/Apps with the BNPL concept

It seems that every year, more and more companies emerge that offer the BNPL concept. Large well-known companies have also started to adopt the concept to keep up with the changing times. Here is a list of companies offering BNPL and the installment plans that they offer:

• Afterpay (Four bi-weekly installments, interest free)
• Klarna (Four bi-weekly installments, interest free)
• Sezzle (Four bi-weekly installments, interest free)
• Affirm (Monthly installments over 6, 12, or 18 months with 0 - 18.00% APR)
• Splitit (Monthly installments over 3, 6, 12, or 24 months, interest free)
• Quadpay (Four bi-weekly installments, interest free)
• Paypal Credit (Monthly installments over 6 months, interest free, min. purchase of $99)
• Amazon Financing (Monthly installments over 6, 12, or 24 months, interest free)

As you may have noticed, many of these companies offer the same payment plans; either four bi-weekly interest free installments or monthly interest free installments. Affirm may be one of the only apps that includes interest with each installment. Large companies like Paypal and Amazon recently adopted this method when apps like Afterpay and Klarna were rising in popularity. These companies/apps usually partner with online retailers and businesses to be listed as one of the payment options. For example, Affirm is partnered with Peloton and Adidas, so only their payment option will be available on those two retailer’s sites.

What are the risks?

Paying for your orders over the course of weeks or months sounds amazing. The fact that your bank account or wallet won’t be hit with 100% of the costs immediately is what draws more and more customers to this option. However, many experts point out that this emerging trend isn’t all sunshine and rainbows and can lead to the development of financially harmful habits.

For one, many customers are choosing this option solely because the initial gratification of paying a fraction of the total cost of your order up front is too good to pass up. If you buy a $600 item and have the option to pay $100 each month for 6 months, why wouldn’t you take advantage of that? This leads to consumers thinking, or tricking themselves, into believing that the purchase is less of a hit to their wallet than it really is. In that scenario, most customers are not thinking about spending the full $600, but rather spending $100 six times. The $100 is way smaller than $600, so customers end up valuing the impact of their purchases as lower than they actually are. This also leads to people buying more and more expensive things because they can afford the installments, not because they can afford the item as a whole. They don’t have enough money today, but they can buy now and pay later, so why not? This is dangerous because it allows the customer to assume or believe that they'll have the money later. They fail to account for emergency spending, bills, and other expenses that they may also have to pay in the future.

Bruce McClary, representative of the nonprofit National Foundation for Credit Counseling, begs the question: “If you can't afford to buy a small ticket item with cash or a standard credit card, should you even be making the purchase?” He later adds, “customers may want to consider working on [their] budget challenges before adding another debt to the list."

When customers are opting to pay for their orders using weekly/monthly installments, they are still paying for the full price, just at different times. It is very similar to paying with a credit card, where the purchase won’t be actually charged to your account until a later date. The mentality of enjoying instant gratification and worrying about the cost later could easily spiral out of control as tracking spending and repayments becomes convoluted. As many as 1 out of 6 customers report that they are overextended from abusing this payment method.

Targeting the younger generation

The BNPL concept and the companies that support it are generally targeting younger generations with this form of payment. This includes kids, teens, and young adults who may not fully understand the concept of proper budgeting. Younger customers are more easily swayed to finalize the purchase if the initial payment is just a fraction of the full cost. The younger generations typically have less money, less knowledge of budgeting and saving, and more spontaneity. The combination of all three potentially leads to many unwise purchasing decisions that are masked under the illusion of delayed payment options. As mentioned earlier, customers will decide to purchase something that is expensive but whose installments are affordable. If this habit is instilled in the younger generation before they are taught about budgeting and saving, this could prove to be detrimental to their financial health.

Other risks

If you miss a payment for BNPL apps like Klarna or Afterpay, you will be charged a late fee. For Klarna it’s $7 and for Afterpay it’s $8. Paypal Credit and Amazon financing are essentially credit cards. If you miss a payment for either of these two, you will potentially be hit with a large fee and/or additional interest, as well as a drop in your credit score. Given your credit score is one of the most important factors of financial health, the BNPL form of payment when using Paypal Credit, Amazon financing, or similar options should be used carefully.

Conclusion

Although the idea of Buy Now, Pay Later seems beneficial at first glance, and may be used to help overcome a tight temporary financial situation if used on essentials, many consumers are carelessly using it to buy luxuries they can barely afford. The fear of consumers developing a terrible financial habit by pushing payments to a later time is a big risk to this system. People who use the BNPL form of payment should first understand the potential financial burden of pushing away payments to the next week or month. They must also ask themselves if they can really afford the full item, not just the first installment. If they don’t put proper budgeting into consideration while using BNPL, it may cause them to fall into debt, pay hefty fees, ruin their credit score, or create a life-long bad financial habit.