Is The Buy Now, Pay Later Option the Road To Financial Disaster?

Is The Buy Now Pay Later Option the Road to Financial Disaster?

By

Marsha Walker Eastwood, BsEd, MSHSV

The psychology of spending versus saving is directly tied to gratification which is defined by Wikipedia as the pleasurable emotional reaction of happiness in response to a fulfillment of a desire or goal.  But, for our purposes here, it is the psychological pull between instant gratification and delayed gratification.

Instant gratification is an impulse behavior that flips on the “I want it now and I will deal with whatever financial ramifications that comes with it another day.” It can be likened to a drug that provides that must have feeling of short-term euphoria and one that can quickly become an addiction, and in this pandemic state we find ourselves in today the need to feel good is even more important.

Just a few decades ago, consumer spending was limited to socking money away for a highly desired item or if they were lucky enough, putting it on a store charge card which had a limit. The only way to have poor credit was to skip payments and/or have the card cancelled and wait for the paycheck garnishments to begin. Back then the financial debt hole was the size of a thimble compared to today. Over the years as plastic money became more readily available, instant gratification was more available as well, but at a much higher price as the interest rates varied depending on credit scores. It also became more difficult for the average Joe to sport a collection of various credit cards. The increasing desire for having coveted items and reckless spending immediately created financial hardships that went from garnishments to an uptick in bankruptcy filings. Then came the pandemic.

In March 2019, a national emergency was declared due to the extensive spread of the SARS-CoV-2 virus. Businesses closed, enhanced weekly federal employment benefits began, and people had money but few places to spend it except online. This situation gave rise to a plethora of online By Now Pay Later platforms, which for many people became the new financial drug of choice. The ads were everywhere and for the first-time consumers could quench their instant gratification thirst by having access to spending platforms that kept their financial feel good under the wire and unchecked. This was possible for a couple of reasons. To use these platforms no hard credit check was made, there was no reporting to the credit agencies, and failure to pay added an interest rate that was previously not attached. Consumers could use as many platforms as they wanted and buy as much as they wanted within their set limits, and credit reporting agencies were none the wiser.

This financial drug of choice rapidly feathered the nests of the various banks underwriting the spending and created a sort of financial bleed that was difficult to stem in many cases. It also increased online sales of unnecessary items, marginally necessary items, and big-ticket necessities. Buy Now Pay Later also changed the business model for the world’s largest retailer. Millions of consumers relied on Walmart’s layaway to do their holiday shopping. In 2021 Walmart ended the layaway and instead partnered with Buy Now Pay Later company Affirm. Instead of the delayed gratification of making a small payment to put a large number of items in the layaway and small payments to keep the items or saving up to make one big payment near the holiday, those customers now must use Buy Now Pay Later. Target customers can use Sezzle or Affirm. But what do we really know about these platforms?

As with any spending, whether it be a local weekly sale, a credit or debit card purchase or Buy Now Pay Later, caveat emptor (let the buyer beware) should always be given thoughtful consideration. It is always better to do due diligence to learn what the platforms offer, if this type of buying suits your financial situation and knowing when and what to buy. Here is a breakdown of the post popular including pros and cons.

Affirm is considered to be the best overall platform. It is totally transparent. There are no hidden fees, and you decide how you want to pay for your purchases, made from a variety of participating vendors, including Walmart, Target, Peloton and Best Buy. You must pre-qualify but there is no hard hit on your credit record. There are no fees, including late fees. Your payment method decides the interest rate. If you choose to pay your purchase(s) within three months there is 0% interest, and if you stretch it out to either six or 12 months the interest rate is 15%, Unlike some similar platforms Affirm offers a savings program that pays 0.65% APR. The first monthly payment is due one month after the purchase is completed. All the following payments will be due on the same day of the month. Affirm is affiliated with eighty-four stores.

Sezzle also requires prequalifying with an instant decision within 60 seconds, there is no impact on your credit score, and they are affiliated with over 41,000 stores. Unlike Affirm, Sezzle requires an upfront payment of 25% of the purchase price at the time the purchase is made, and the remaining balance is spread out over the next six weeks at two-week intervals. This platform works best for working individuals who get paid every two weeks. Should unforeseen circumstances occur, you are allowed one free opportunity to reschedule a payment. All purchases are interest free, but Sezzle charges a $10.00 late fee. Over 40,000 stores are affiliated with Sezzle including Target.

PayPal In 4 is the best option available for small purchases of $30 to $1500. Affiliated with millions of online stores, and backed by PayPal, the Buy Now Pay Later option requires a PayPal account in good standing. Approval is instant – within 60 seconds of applying, 25% of the purchase price is due at the time of purchase. Payments are due every two weeks, and the purchase is interest free if paid within six weeks. As with the other platforms, a soft credit pull is made with no impact to your credit score. The consumer just must make sure funds will be available for the bi-weekly payments.

Klarna’s Buy Now Pay Later platform is like the sites, it is possibly the best option for large purchases because in addition to their four-payment option you can also take advantage of pay-in-30 and six- to 36-month financing if you qualify. Information provided from Klarna’s website states that in keeping with their own line transparency, “Paying after delivery allows you to try before you buy and is the easiest way to shop online. Complete the payment 30 days after purchase at no added cost. Report returns directly in our app and only pay for the items that you keep.”  Klarna is affiliated with more than 70,000 stores.

Buy Now Pay Later mandates personal fiscal responsibility and oversight. This means considering your shopping goals. Can your budget handle these extra incremental payments every two weeks? As little as nine dollars here, six dollars there every two weeks can be a budget buster. Are you going to be more inclined to shop at more expensive specialty stores? This includes frivolous purchasing of feel-good items such as cosmetics, home goods and clothing. Do you really need that extra tube of lipstick, or another pair of sandals? How many jars of anti-aging cream do you need? When you add in the cost of shipping is that giant box of disposable diapers a good idea? Is it feasible to use a Buy Now Pay Later platform for a refrigerator or stove? Remember just because you can doesn’t mean you should. When then is a good time to use Buy Now Pay Later?

A good example would be if a major department store is having a great online only sale on an item, you had been considering buying for some time and free shipping is offered, then using the platform would make sense. The worst-case scenario would be to use Buy Now Pay Later for disposable items such as groceries, cleaning products and personal care products, along with reading materials and gifts.

The number of retail affiliations with Buy Now Pay Later platforms continues to grow due to the ease of acceptance, buying and inflation. The instant gratification of getting items now as opposed to the delayed gratification of waiting until it fits your wallet is a type of emotional seduction that is hard for many to resist. It is an ego booster and a soul soother that can quickly lead to an addiction that can wreak financial havoc, especially during the holiday season.

In the final analysis all Buy Now Pay Later platforms are designed to increase consumer spending and increase retail sales. All include pros and cons ranging from minimum purchases to the ability to obtain financing for big ticket items, but only one includes a savings platform with interest. In all things financial, it bears repeating, Caveat Emptor.

©Marsha Walker Eastwood

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