People buy things via credit for various purposes other than the lack of money on hand, such as taking advantage of a promo or simply for convenience. Nowadays, in addition to using credit, we often see merchants offering buy now, pay later (BNPL) services. With BNPL, consumers can purchase with little to no upfront payment, and the balance is often divided into monthly installments. Aside from the full payment being broken down into installments, the appeal is that no interest is paid for these deals. Still, debt can be a liability if not handled on time, so the BNPL service can drown consumers in debt.
The cost of deals
BNPL schemes are most popular with online shopping platforms. With the rise of digital stores, these deals often give customers more flexibility with their finances. There are real benefits to BNPL services, however, it can also present risks. Research from the Harvard Business Review found that choosing BNPL resulted in a significant and immediate boost in spending. Consumers who opted for these services were more likely to make a purchase, with the likelihood rising from 17% to 26%. Furthermore, consumer purchases also increased, with basket sizes increasing by 10%.
Mind trick
People who choose BNPL services often think they are spending less since payments are broken into smaller portions. For people with a tight budget, it can be beneficial to pay things in installments. This way, they can allot money for necessities, savings, debts, and other monthly expenses.
However, some merchants implement shorter periods to pay, such as a three-month period. Although the amount is still broken down into smaller sizes, it may still be too much for some. Still, there are those who are willing to take that promo just to take advantage of the deal. Other merchants would also implement a long payment period for easily perishable items. An example would be a restaurant that offers a BNPL service for a year on meals.
Increase in spending
When people feel like they are only paying a small amount for a time, it may also lead to overspending. Other BNPL services encourage people to buy more for extra incentives or deals. They may offer freebies if a certain price is reached or interest in bigger purchases lessens. Ultimately, this only leads to spending more than planned. Again, it’s the idea of taking advantage of deals that lead consumers to splurge.
Reading the fine print
While most BNPL services offer 0% interest, others may have additional fees or charges. Since there is a period when one should pay the loan fully, late payment charges may be applied for delayed payment. Understanding the terms and conditions before purchasing can prevent unnecessary and unplanned expenses.
Take charge of your finances
Unexpected purchases will always occur, and often, they constrain our budget. Emergency cases and other unexpected circumstances may also arise, so it’s important to set aside some resources for that. With that in mind, we must still learn to be responsible consumers by keeping track of our finances.
Rewarding ourselves occasionally is understandable and often encouraged for a better mental state and quality of life. However, sticking to the budget by only using the allotted portion for such activities can provide peace of mind. Being financially savvy may also save one from the horror of accumulating debt from BNPL service.
Photo credit: The feature photo is symbolic and has been done by Blake Wisz.
Sources: Dionysius Ang and Stijn Maesen (Harvard Business Review) / Consumer Financial Protection Bureau
