Why I think consumers should avoid buy it now and pay later apps
- During my years as a personal finance writer, I learned a lot about Buy It Now apps with pay back.
- In most cases, I don’t think they are good for consumers because they encourage overspending.
- However, I have one exception: I think sometimes it’s worth taking out a 0% interest loan.
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Buy Now and Pay Later apps and services are popping up all over the online shopping world.
You can use Affirm to buy a Peloton, Klarna to buy Nike, and Afterpay to furnish your home, to name a few examples.
And at first glance, these buy-it-now, pay-later apps seem like a good thing. Who wouldn’t want to make a few small monthly payments instead of paying a large amount of money up front?
It’s a proven model that works for a lot of people too. Auto loans and mortgages work the same way – take out a loan to pay for an expensive item and pay it back over time.
But is there a downside to adopting this same pattern for everyday items?
In my opinion, as a personal finance writer, yes.
What are buy it now and pay later apps?
Before I dive into the pros and cons of these apps, I wanted to give a quick overview.
A few popular companies offer this service, including:
Most immediate buyout and later payout businesses offer one of three types of loans:
- Traditional fixed rate loans: Usually these loan terms vary from three to 36 months with 0-30% interest, depending on the item you are purchasing and your credit score.
- Pay in four: Results in a refund of an item purchased in four equal payments due every two weeks, with the first payment due upon purchase. These are usually interest free loans. So if you purchased an item for $ 400, you owe $ 100 at checkout and an additional $ 300 spread over the next six weeks.
- Pay in 30: This is another interest-free loan that Klarna sometimes offers that looks a lot like a credit card – you just need to pay off the entire item you purchased within 30 days.
Either way, buy now and pay later services make it easier for consumers to spend money now by deferring payments into the future.
Why I think buy it now and pay later apps are bad for consumers
Purchased now and paid apps aren’t always a bad thing. But in general I think they have the potential to do more harm than good.
Starting with the positive you can get interest-free financing with these apps.
For example, using Klarna’s Pay in 4 plan essentially gives you a six-week interest-free loan. And interest-free loans are always a good thing mathematically speaking, thanks to the time value of money.
Even with traditional Affirm financing, if you have a good credit rating, you could get a much longer loan with no interest or at a low interest rate. Sometimes as long as 36 months.
If you can afford the item you’re buying and really need it, the ability to get an interest-free loan can be a good thing for consumers.
However, the biggest downside to buy it now apps with pay-as-you-go is that they encourage overspending.
Paying $ 40 per month for 36 months seems a lot better than paying $ 1,440 now. Splitting the payment into several smaller payments makes all the best, but you have to understand that it is the same thing and you are still spending $ 1,440.
Similar to credit cards, you should use these apps as a tool to help you and not as a crutch to enable bad spending habits.
It is also worth saying that interest and fees apply for these loans in many cases. These costs can quickly offset the benefit of delaying payment. For example, they could turn a purchase of $ 1,440 into a purchase of $ 1,500, $ 1,600, or $ 1,700 +.
Another minor drawback is that most of these companies do not report to credit bureaus. Thus, you will not get any credit score advantage by making payments on time.
And finally, small loans can be difficult to manage. It’s easy to remember to make the monthly mortgage and car payments, or even set them to automatic payment. But can you imagine having a loan for every item you buy? Or even just for any item over $ 50? If you don’t put them on auto-pay, it’s easy to lose them in your monthly budgeting mix.
It takes time and effort to manage multiple loans to make sure you don’t miss payments and incur late fees.
Buy now, pay later: is it worth it?
Overall, I don’t think companies that buy now and pay later are good for consumers. There are too many risks associated with using these services and not enough potential benefits to outweigh them.
Much like microinvestment, these apps have good intentions, but I’m not convinced that all consumers will use them for their own financial gain.
Granted, if you’re a consumer who uses them once or twice a year to take out an interest-free loan on a big purchase (like a sofa, winter coat, or mattress), I think it would be worth it. hardly.
However, I don’t think they will benefit the vast majority of consumers who risk using them to justify their daily purchases and get caught spending more than expected, in addition to potentially paying interest and fees.