The Buy Now, Pay Later Trap

If you have shopped online recently, you have probably noticed an option at checkout to spread your purchase over smaller future payments, sometimes without paying any interest. This is known as “buy now, pay later” (BNPL) and it has been all over the news the last few weeks.

There have been several high-profile acquisitions with PayPal and Square both acquiring BNPL firms recently. Amazon announced last month that it would start offering BNPL services to its shoppers, and it seems like we get a new BNPL startup raising $100 million+ in funding every week.

Some of these offers include an interest rate on the same level as credit cards (i.e. 15%+), and should be avoided with the same fervor as credit card debt.

But what about a BNPL offer with 0% interest? It’s tempting to think that this would be a good thing for your finances, or neutral at worst. If you’re going to pay the same amount either way, why not hang on to your money a little longer and earn some interest?

But the big business of BNPL isn’t built on altruism. The reason retailers are willing to offer interest-free loans is that they know we’re going to spend more because of it.

In a press release announcing a $150 million round of fundraising, Scalapay (a BNPL company in Europe) claims that BNPL causes the typical customer to spend 48% more.

This is not surprising. A small monthly payment is easier to stomach than a larger lump sum payment today. It’s the same reason so many people end up with a car they can’t afford.

The reality is we aren’t good with monthly budgeting. A $50/month payment might seem like it can easily fit in your monthly budget, but so few of us know how much we actually spend per month. And when you add several small monthly payments together, you can end up with a total monthly payment that’s not so small.

BNPL is great for the retailers who are selling us stuff we don’t need, but as a whole, it’s not good for the finances of the customer.

We can try to cheat the system and only use BNPL when it’s interest-free for purchases we would have made anyway, but that’s a hard rule to keep in practice. Our brains are being exploited into spending more, and rather than fight against our natural instincts, it’s best to avoid BNPL altogether.

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