MONEY THOUGHT:

WTF is BNPL?

It’s a craze taking internet shopping by storm. Walmart, Apple and Amazon have all jumped in. But this trend has nothing to do with TikTok (good riddance). No, I’m talking about the option that pops up on an internet check-out page that says “You can pay for this now OR you can buy this with 4 easy monthly payments!” (did you read that like an infomercial? Because you should have read it like an infomercial). That new feature of splitting your total into monthly bills is called BNPL. But, WTF is BNPL and how does it work?

BNPL stands for Buy Now, Pay Later. Most of us probably better know it by the companies that provide BNPL services: Klarna, Affirm, AfterPay, Sezzle, etc. They offer to split your purchase into a series of smaller, equal installments. Often, it’s 4 payments over 6 weeks. And they usually promise no interest and very little fees to do it.

It kinda feels like taking candy from the bratty kid at the playground. You get “free” candy and don’t feel too guilty about how you got it. But it’s a slippery slope. And it’s easy to get into trouble.

BNPL allows shoppers to experience the rush of buying something shiny without the immediate financial consequences.

The creation and rise of BNPL is a direct result of the Great Recession in 2008 in two ways. First, seeing adults struggling to pay their credit card bills during the crisis made Millennials and Gen Zers wary of using credit cards at all. Secondly, a bill passed to protect consumers from predatory lending made it much harder for under-21s to get a credit card.

This has made Buy Now Pay Later services particularly popular with the digitally-savvy, under-40 crowd. A nasty combination of the fear from credit cards, familiarity with internet shopping, and psychological nudges to keep up with what is on social media swirled together to create a new breed of reverse layaway. Where ye olde payment plans of yore meant you didn’t get your stuff until after it had all been paid for, BNPL gives you what you want ASAP and says “we’ll figure out da payment later”. Like some Jersey mobster.

Also like a shady back-alley deal maker, BNPL providers often don’t check too deeply into your ability to repay. Where a credit card will check your credit score before letting you buy on credit, most BNPL plans don’t look at that history. Because they’re issuing a loan for just the specific purchase you’re making at that moment, they say they don’t have to.

This can be a good thing for people with low credit scores, but the flip side is that BNPL companies aren’t reporting your good habits back. You’re not building your credit score even through you might be using this credit super wisely.

There’s also often a reason that a person may have a low credit score. And that reason is usually that they are under financial strain. A BNPL issuing credit to someone who is already struggling to pay their bills is making that person’s problem worse.

And because each provider is working within their own little bubble, it’s possible to have payment plans across every different BNPL company. When you take out one loan, paying back $50 every-other week might not sound impossible. But if you’re paying multiple $50 loans back across many platforms, things can get complicated. Small amounts stack up fast and are easily lost.

Any juggler will tell you that the more items they have up in the air, the harder juggling is (I think. Honestly, I have no idea if this is true, I never figured out how to juggle). Keeping up with multiple bills is like that. Except if you drop this ball, your entire financial life could be ruined.

The other potential problem is that 4 payments in 6 weeks doesn’t follow most paycheck schedules. So if someone is taking this payment option because they’re cash-strapped, they are almost certain to run into a time when two payments are required from one already stretched paycheck. If this isn’t planned for, it will be a problem.

Clearly, I’m not a fan of BNPL. I’m a huge advocate for save-until-you-can-afford. Buy Now Pay Later is exactly the opposite of that. But I do recognize that BNPL can have it’s uses (honestly, all financial instruments have some kind of legit use — looking at you annuities and life insurance — it’s when finance people get creative with those uses that products get a bad rep).

Buy Now Pay Later is a decent tool for one-time, unexpected but necessary purchases. Things that will require more than one credit card cycle to pay off are good candidates. Emergency car repairs would be a good example. This is where you can use the favorable borrowing terms (aka: zero interest and /or low fees) to your advantage.

Things you definitely should not use BNPL for? Anything consumable. Clothing. Shoes. Make-up. Travel. Entertainment. These are all things that are not needed for life (no matter how much you love Taylor Swift, going to her concert is NOT a necessity).

In most cases, I’d still choose credit card over BNPL. There are better user protections and fraud prevention on credit cards than through Buy Now Pay Later providers. A responsibly used credit card will boost your credit score, giving you access to better lending terms in the future. And if a purchase put on a credit card can’t be paid off by the end of the billing cycle, that’s a sign you have to reassess your spending.

Remember, friend, the internet is designed to get us to spend. BNPL is the latest scheme to part you from your money.

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Wisconsin CERTIFIED FINANCIAL PLANNER™ professional and educator Sarah Paulson

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Although I’m a born-and-raised Wisconsinite – living in Appleton, Wisconsin –

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