Buy Now Pay Later: Ditch This Trend In 2024
Alternatives to consider instead
Consumer spending reached an all-time high during the 2023 holiday season with consumers spending $222.1 billion dollars in a variety of different categories including top categories like electronics, toys and apparel.
Of the $222.1 billion dollars spent, $16.6 billion dollars was spent through Buy Now Pay Later loans. An alternative to credit cards, this payment trend has caused many people to rack up what is known as “phantom debt.”
In fact, these types of payment plans increased 14% over the recent 2023 holiday season.
Are you considering a Buy Now Pay Later Loan for your next big purchase? Here’s what you need to know about these tempting loan programs and what better payment options are out there.
What are Buy Now, Pay Later loans?
Buy Now Pay Later Loans, or BNPL, allow you to make a purchase by receiving a loan from a BNPL company such as Affirm, Afterpay, Klarna and even Paypal. Often, the money is given without an interest rate and can be paid back in installments.
In one aspect, BNPL loans can seem helpful when you need to make a purchase but don’t have the money yet. Additionally, these loan companies don’t report to any major credit agency.
Are BNPL loans a financial risk or a relief?
Buy Now Pay later loans can be both a relief and a risk at the same time but more so of a risk. Here’s why:
BNPL makes it easy to spend impulsively: We’ve all given into impulse shopping, which is why BNPL loans are so tempting. Yet, they can lead to more impulsive purchases.
You may find yourself making multiple different payments: You are given the convenience of being able to spread out your payments with BNPL loans but taking out too many loans can lead to making multiple installment payments.
Additionally, these loans can prevent you from having a clear awareness of your total debt because your debt isn’t reported to the credit bureaus (unless you default). A popular term for this is known as “phantom debt.“
All in all, BNPL contributes to the accumulation of debt and this is why it’s more of a risk than it is a (temporary) relief.
The dangers of Buy Now, Pay Later loans
It’s important not to be misled by the convenience or quick relief of BNPL loans.
Late payments can trigger late fees and interest applied up to the tune of 30%! In fact, according to data by Lending Tree, 40% of BNPL users admitted to making late payments.
More importantly, they can report you to collections agencies, and in turn make it difficult for you to receive loans from other creditors in the future.
Even if you do make your payments on-time, these payment don’t positively impact your credit score because your on-time payments are not reported to the credit bureaus.
Alternatives to BNPL loans
So now you know that BNPL loans have their setbacks, but what can you do instead? Here are some alternatives to consider instead:
Create a guilt-free savings account
Saving up for a desired purchase may sound a bit old school, but it’s really one of the best methods for buying more expensive items.
One of the best ways to ensure that you save money instead of spending it is to automate your savings. Automating your savings can help you save money faster and takes less willpower.
Trust us; it’s way more gratifying to buy what you want when you can use your own money rather than relying on anyone else.
Prioritize some money in your budget
Impulsive purchases can sometimes be a result of a restrictive budget. If you’ve been focused on keeping to your budget, make sure you give yourself some breathing room.
Add a “spending money or fun money” category to your budget. When you have money dedicated to spending on whatever you want, you can spend guilt-free.
Also, the best part about having a spending section in your monthly budget is that if you don’t spend that money, you can put that money into your savings account.
Assess wants vs. needs
One of the most powerful things you can do to stop impulse buying is wait. Yes, wait at least 48 hours. Chances are, you’ll forget what you wanted within that time, and it will no longer be an issue.
If you decide you want to buy it, ask yourself, is this something I need in my life, such as food, shelter, medical care? Is that item connected to a need?
If it’s not, that’s okay too. If you discover that it’s just something you want, make a plan to save for that item. Alternatively, you can start setting money aside for more impulse purchases to splurge and not feel guilty about it.
Although BNPL loans are convenient, they can foster detrimental habits. Instead, adopt the practice of saving for your desired items, making cash payments, and deriving satisfaction from sticking to your budget.
Get the extra motivation and clever tactics to save money by exploring our entirely FREE financial courses.