Don’t be put off by “buy now, pay later” plans
Like kids of any age, I loved cartoons when I was a kid.
But as a kid interested in money, the quirky comic book character who always intrigued — even though he engendered love-hate feelings that I didn’t recognize until decades later — was J Wellington Wimpy, commonly known as Wimpy, of Popeye fame.
He wasn’t a heavyweight action hero, living up to his drawling image.
I loved his one-liners and quick thinking, always seemingly about money.
Wimpy would be “happy to pay you Tuesday for a burger today.” I watched him scramble to pay for things, get items for free just promising to pay for them eventually.
And then I realized he probably never paid for them down the line; even though his intentions were good, it made him a mooch, a behavior I never admired at all.
Fast forward to today and that’s why I’m understandably skeptical of ‘buy now, pay later’ [BNPL] programs that have become increasingly popular in recent years, with the largest operators seeing their activity increase tenfold or even more since 2019.
What seemed mostly innocuous – most BNPL loans range from $50 to $1,000 – as an alternative form of credit for online purchases looks different in the harsh light of runaway inflation and rising prices. interest rate.
Consumers have easily adopted the Wimpy persona – volunteering to pay soon for the item they want to buy today – without even thinking about the consequences.
Yet BNPL is a Venus flytrap of finance, beautiful to look at, terrible to get too close to, and chances are the upcoming holiday season will prove it. Unlike the old cartoon mayhem, the punch in the mouth that some consumers and the economy more broadly will suffer will be no laughing matter.
Back in the days of Wimpy, buy now, pay later was known as “layaway”, the main difference being that layaway plans [still available today] do not deliver the product until all has been paid for.
BNPL plans are an interest-free form of credit that offers the consumer the product now, with the loan usually repaid in four instalments. The first payment works as a down payment on the purchase, and offers are subject to late fees if subsequent payments are missed.
These programs have been legitimized by retailers pushing them to the point of online payment. Borrowers tend to be younger and lower income, although many users have credit cards and other payment options available, but instead gravitate towards BNPL because they like to know exactly what they owe, how often and for how long.
In addition, this financing is generally easy to obtain and quick; applicable interest rates vary widely, and although consumers tend to think they’re getting a good deal, the fine print is the only place to confirm whether rates are better than those available on credit cards.
But Hugh Tallents, a senior partner at cg42 – a consultancy that studies competitive strategies – says buy now, pay later is “nothing more than a payday lender disguised as something that shouldn’t be in a technology company.
This comparison should make consumers wary, as payday lenders – which provide very short-term loans with easy approvals but outrageous interest rates – are widely seen as predators, trapping borrowers who cannot meet the payments in a cycle from underwriting new loans to repaying old ones. Their offers may bridge the gap until the next payday, but often widen the money pit a consumer will face later.
BNPL is particularly dangerous because, according to a recent cg42 survey, almost 80% of consumers do not feel that the programs actually involve debt.
A layaway plan is not a debt because the product is not purchased until the final payment is made. With “buy now and pay later”, borrowers have taken on an obligation.
“People are spending future paychecks that they haven’t earned and have no guarantee of earning, in an environment where inflation is still high, wages are still way below that inflation and we’re starting to see layoffs and hawkish Fed policy that is meant to create additional unemployment,” Tallents said in an interview on my podcast, “Money Life with Chuck Jaffe,” earlier this week. boils down to the idea that this is not going to be a good situation for people, especially young people who depend on it to supplement the way they live their daily lives.”
The problem is that BNPL can be habit-forming. Who doesn’t like Wimpy’s approach when they can get away with no perceived cost?
But if consumers start paying this way now – at a time when they can afford these things – there’s a question of what will happen if they continue to mortgage future incomes as the environment turns hostile. to such behavior.
Expect to see sellers adding more fees, charges and penalties — just like credit card issuers did when this industry first emerged — and more consumers being denied credit. [If you find yourself having issues with a BNPL service or product, submit a complaint online to the Consumer Financial Protection Bureau at consumerfinance.gov, or call the agency at (855) 411-CFPB .
Since buy now, pay later loans are relatively new and haven’t seen an inflationary period before, their impact on the economy as a whole will be difficult to gauge, but Tallents expects a BNPL’s debt bubble bursts this winter, fueled by heavy use of the programs over the holidays and until regulations control growth “and/or the wheels come tumbling down for the consumer.”
Unfortunately, the people most affected by the problem will be those who can least afford it.
If you haven’t handled credit cards and debt well in the past, don’t be fooled into buying now, pay later.
It’s the wimpy way – literally and figuratively – of managing money, and you better eat your financial spinach and stay strong against anything that would encourage overspending and overextending credit in the market. inflationary today.