Back in the day (like in the 90’s) if you wanted to buy some clothes, but you couldn’t pay for them now, you could put them on layaway. Layaway allowed you to put things on hold, pay for them over time. Once you had it paid off, you could take it home. Layaway was completely free. If you couldn’t afford to make the rest of the payments you just went back to the store and let them know. They gave you your money back and you went about your business.
Until recently, Walmart still offered layaway to their customers. It has been replaced with a product called Affirm. With Affirm, you can buy goods now, and pay for it later. Sounds great, right? Well, maybe.
How Buy Now, Pay Later Works
Many of us do a lot of shopping online. You may have started noticing that when you are checking out, you now have the ability to pay using Affirm, Klarna, or afterpay. For example, I am looking at nail polish and I can either pay $55.00 now, or I can divide it into 4 interest-free installments of $13.75 via afterpay. You link a credit or debit card to your account afterpay account. As long as payments are made on time there are no interest and no fees. However, If you are late or miss a payment, they can demand the full balance as well late fees.
Why Merchants Like It
According to the Affirm website, merchants can, “remove price as a barrier, turning browsers into buyers, increasing average order value, and expanding your customer base”.
Another nice thing, for the merchants, is that Affirm will pay the merchant the full price of a purchases upfront within 1 to 2 business days. Why would companies like Affirm do that? They are doing that because they are betting against you. They have data telling them people who need a short-term loan are likely to default enough times for them to be profitable.
Why It Works
Buy Now, Pay Later is an effective strategy to get people to buy things they either can’t afford today or don’t really want that bad by creating the allusion that it is inexpensive. If you are at the mall and see a $100 sweater that you kind of like, but don’t have the money to buy, it’s hard to rationalize the expense. On the other hand, if you could only pay $25 for it right now………well……..maybe it’s ok to get it.
Who This is Terrible For
There are some people who are super organized, can delay gratification, and can work within a budget who can use this option from time to time. However, if you struggle with any of the following I suggest you pass:
- You have a hard time keeping track of your bills
- You tend to pay things late
- You have bounced checks or use your overdraft protection
- You are suseptible to forming a bad financial habit
- You have a lot of debt
Buy Now, Pay Later is a short-term loan. If you read the terms and conditions, you will see words like “closed-end installment loan product”. For example, Affirm states “Interest Rates: Rates range from 0% to 30% fixed Annual Percentage Rate based on your creditworthiness”.
A lot of personal finance comes down to financial behaviors and habits. Buying things you can’t pay for is bad financial behavior. Those with bad behaviors pay more in fees and finance charges than those with good behaviors. That is why these companies exist. They exist to convince you it’s no big deal, you can have just one more thing to pay off. When you miss a payment it’s payday for them and the start of a financial spiral for you.
What You Can Do Instead
If you find yourself wanting to buy things, and you don’t have the money for it here are some ideas for getting what you want:
- Divide the purchase price into 4 payments and pay yourself. Delaying gratification will allow you to get the item without risking your credit
- Sell some old things to raise money for new things
- Give yourself a “cooling off period”. Wait 30 days, and if you still really want it, go get it
- Get a side hustle
- Shift money from other parts of your budget
Bottom Line
Buy Now, Pay Later is a trick to quietly suck money out of your pocket while waiting for you to screw up. Learning the skill of delaying gratification and saving for what you want is a much better way to go about it.