Buy Now, Pay Later (BNPL) payment options are on the rise.
Also known as point-of-sale installment loans, BNPL is growing in popularity among younger consumers. A 2020 study on the subject revealed that buy now, pay later offers from service providers in the United States had increased by 197% within the last year.
By the first quarter of 2021, that figure had grown to 215% year over year, according to another survey carried out by Adobe.
Buy now, pay later is spreading like wildfire due to the shift to online spending, plus the financial effects of the pandemic which has left many facing a cash crunch. This short-term financing allows customers to pay for their purchases in monthly installments.
When you are low on cash or waiting on your salary, the allure of monthly installment payments can seem too good an opportunity to let pass.
Especially when you consider the fact that they are interest-free. This doesn't imply that using BNPL options are always a good deal.
Unfortunately, borrowing money never comes without consequences.
A buy now pay later offer is still technically a loan, if you miss payments, you will potentially face late charges, plus additional interest. Also, keep in mind that these companies are making money.
BNPL processors charge merchants between 2% to 8% of the purchase amount. Some providers also charge a flat fee of $0.30 per transaction. These charges drive up the costs of goods and services for the customer.
BNPL erodes financial discipline.
The virtues of delaying immediate satisfaction that comes with saving and investing as building blocks for long-term wealth are partly defeated by the instant gratification that comes from buy now pay later offers.
Being dependent on BNPL normalizes debt as a way of life, which makes it considerably difficult for you to achieve financial independence.
The idea of paying for something later encourages you to shop more than you would have initially if you didn't have an extra source of credit.
As such, you may end up buying things that you want, but don't need. Its flexible payment option allows you to finance purchases you would have initially not considered.
The lure of easy money makes it easier to rack up more debt.
If you are given the option of paying for something that costs $500 and spread it out in installment payments over 12 payments at a cost of $30 monthly, that sounds more manageable than paying the total amount at once.
The small amounts added up can accumulate to larger amounts, which makes it more challenging to pay off.
Using BNPL options can affect your credit score, which hampers your eligibility to get loans or negotiate for lower interest rates.
Most BNPL lenders don’t report payments to the credit reporting agencies as at when due. However, they are always quick to inform them when you have missed payment. If you intend to build credit, take out time to understand how the particular lender handles your payment reports.
When using BNPL options, you are inadvertently robbing your future self.
Postponing payment now means you would have to settle in the future. This limits your chances of achieving financial independence because your debt would always hover above your finances like a dark cloud.
Also, you have to consider the fact that as we grow older, responsibilities also increase. This means you would be spending more money in the future to take care of those responsibilities. Combining them with debt payments makes it more difficult to save or invest.
BNPL is technically a loan, which implies you are getting yourself into more debt. There are various ways you can avoid the BNPL trap.
The easiest way to manage money within your means is by creating a budget and sticking to it.
Creating a budget outlines in black and white how you spend your income. This allows you to identify loopholes in your expenses and fix them.
You would be able to cross out or reduce unnecessary expenses, thereby freeing up more cash, which can be used for more profitable ventures.
Developing a habit of savings has a two-pronged effect on BNPL.
First, it makes you more frugal with money, which tapers impulsive buying. As such, you are more likely to focus on buying the things you actually need, not want.
Secondly, a savings habit allows you to appreciate the time value of money. When you realize that you would have to pay for the item in the future, you begin to acknowledge the effect of time on money.
You would ask yourself if you had saved or invested that money, what yields would it bring in the future for you.
This is a good old fashion way of money management.
However, in a society where impulsive consumerism and debt racking is encouraged, it can be difficult to develop such a trait. The key thing is developing the willpower and character to be financially disciplined.
If we live within our means, then we would not need BNPL options. Rather than taking the easy way out, we would prefer to save towards that item we need.
Rather than using BNPL, why not wait for discount seasons and clearance sales?
You can get that same item at a lower cost. Plus you get to pay in full, without racking up debt. This is a win-win situation for you.
Debt valuation implies assessing the value of debt that you want to incur, and its impact on your finances.
Not all debt is bad. When used properly, debt can be a good investment strategy. For example, taking out debt to buy a home or start a business.
On the flip side, debt can also be a quicksand to achieving financial independence. For example, taking out debt to finance your vacation expenses. One way you can avoid the trappings of BNPL options is by assessing the value of the debt you want to incur.
This allows you to ascertain if the debt is really worth it.
Unfortunately, in most cases of BNPL, it is not worth it. The scope of BNPL options is only streamlined towards retail shopping.
Provided you have funds to take care of your necessities, you do not need to take out deferred debt to purchase a TV or new sneakers because these things have a minimal positive impact on your finances.
While ‘buy now pay later' options may seem like free money, people have to realize that there is nothing like a free lunch.
There are always costs to bear for borrowing to repay later, no matter how minimal.
BNPL feeds off consumerism and impulsive spending. It encourages people to live above their means which can lead to a false sense of financial security.
It is no coincidence that BNPLs are mushrooming at a time when the government is issuing stimulus checks and people do not have much time on their hands other than to shop online.
Debt in whatever form should be frowned at, unless it is used to create extra sources of income.
Understand that you could be charged a penalty fee or interest if you are late on your payments. It could also affect your credit score. Perhaps more important, dependence on BNPL options can negate future financial independence.
When it comes to financial independence and wealth building, sometimes waiting is worth it.
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