If you’ve been doing any online shopping recently then you’ve no doubt come across a “buy now, pay later” app. Whether it’s Klarna, AfterPay, Sezzle or countless others, they are all promising the same thing; pay a small amount for your purchase now and worry about the rest later. Buy now, pay later (BNPL) apps are promoted as a new, more accessible, and stress-free way to online shop.
That all sounds great but how does it all work and is it a good idea to use these apps? The answers to these questions and more are what I’m delving into today. I’m sharing how BNPL apps work, why they’re so popular, and if they’re too good to be true.
What are “buy now, pay later” apps & how do they work?
BNPL apps work with online retailers so that consumers can make purchases that they don’t have to pay all of upfront. Instead the consumer pays for their purchase in pre-determined installments over a designated period of time. What the retailers gain from this partnership are potentially larger purchases that are paid in full by the app, and BNPL apps make money by charging the retailers a fee for the transaction. This is quite similar to how credit card companies work. (Investopedia).
For example, if you decide to make a purchase with one of these apps then you’ll only be charged a fraction of your purchase at checkout. The rest of the sum of your purchase will typically be divided into 3 installments, spaced out over 6 weeks. Contrary to credit cards, some of these apps don’t charge any interest fees. However, some apps will charge you late-payment fees if you fail to pay an installment on time. The sign-up process is also faster than applying for a credit card since approval isn’t contingent on running a credit check. These apps charge you for the remaining installments by being linked to your debit or credit card.
That all sounds pretty good right? Well, yes and no. These short-term loans are often too short and won’t be reported to credit bureaus meaning you can’t build up your credit score by using them. However, they could still hurt your credit score if you fail to make your payments on time. For some of the apps, the “interest-free” payments only last for a pre-determined amount of time. Subsequentily, if you make a late payment then you might be slapped with even higher interest and late fees than credit card companies.
Why have they become so popular?
These apps are generally targeted at 18-35-year-olds, that want to stay on trend and have a Instagram-worthy lifestyle, at a fraction of the cost. Except they’re not getting that lifestyle at a lower cost. Even if you’re not paying the full amount of your purchase today, you will still have pay it at later date. Beware, if you consistently buy via these apps those once small increment amounts can easily get big, quickly. This puts you at risk for not being able to pay on time because you never had the money to begin with. Similar to credit cards, if you can’t afford to pay for something up front, then you should reconsider the purchase.
BNPL apps are designed to be easy to use and have few barriers to entry, their main purpose is to get you to spend more money, more often. By doing so, you’re making more money for both the app and the businesses they’ve partnered with. They market themselves as the a new budgeting tool for consumers, when in reality they aren’t saving you any money.
Should you use them?
With all that said, are BNPL apps bad? No, BNPLs are not inherently bad. However, just like credit cards, if not used responsibly, they can easily lead to unnecessary debt. Always read the T&Cs and make sure you understand an app’s policies on late payments and interest fees. Also, these apps are best for relatively small purchases if used at all.
BNPL apps tend to encourage overspending in a society that is always chasing the newest, shiny thing. BNPL companies are also relatively new and not yet thoroughly regulated by financial institutions. So be cautious, don’t use them if you want to squash your FOMO or have a spending habit. As always stick to an actual budget to figure out how best to handle your money.
NOTE FROM BG: At Budget Girl we don’t recommend the use of BNPL apps because there are no actual financial benefits to using them. Unlike credit cards that can give you back cash or points and when used properly and contribute to a high credit score, BNPLs will only negatively impact your finances. They are designed for you to charge now, pay later with the hope that you’ll forget to pay and end up paying a lot more. They hope you’ll consider something “just $4 a month”…. dozens of times which will add up to a big debt payment that you may not be able to afford for items you may no longer even care for. The “no interest” advertisement is them betting you will forget to pay or charge more than you can afford to pay back. They’ll get their money out of you. Don’t play with this type of snake. It bites.
Have you ever used BNPL apps? What was your experience, let me know in the comments!