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BNPL (Buy Now Pay Later) is a financing option being offered by more and more companies to increase sales. The practice consists of an interest-free payment plan where the customer pays in installment payments because they cannot currently afford the item they currently wish to purchase in full.
How it works
When purchasing an item, the customer is contractually obligated to make installment payments on the item being purchased without interest. Plans can be divided into equal parts in which the customer will pay until the item is completely paid off. Payment plan agreements can be quite flexible ranging from weekly, bi-weekly and even monthly depending on the agreement. Missing a payment can incur late fees (which do incur interest if you're unable to pay it), account fund freezes, or in worst case scenarios, being sent to a debt collector which can affect your credit score.
Why it is a problem
Much like credit cards, this provides consumers with a false mindset in which they start to spend more than they actually have. This is due to the first initial part of the payment being a fraction of the total cost. If the consumer is not keeping track of payment dates that are due (since each item being purchased may have separate agreements for when you have to pay), this can lead to a pile-on effect where the customer gets billed a bunch of late fees that they owe interest on because they were not able to pay the agreed upon amount. This can lead the consumer into financial ruin because they now owe the late fee (with interest if not paid immediately) plus the amount that was due. This increases the chances that the next payment owed will be late, leading the consumer into a debt cycle which can eventually lead to bankruptcy.
And even in an ideal scenario, when no interest or late fees are owed, the final price is still typically more expensive than the normal sale price. For example, a couch that sells for $300 could have a BNPL price of $30 a month. This might initially seem like a better deal, as you'll pay less money at a time, but the total cost of BNPL would be $360.
Examples
- Affirm to pay for your groceries.
- Afterpay to pay for gas.
- Klarna to pay for Doordash deliveries.
- Abunda to pay for clothes and household items.
References
