Buy Now, Pay Later?

Buy now, pay later (BNPL) has turned front and center during COVID.

On paper, it makes perfect sense for consumers. Why shell out $2k for a new couch when you can float payments over a few years? Why spend $100 outright on a pair of jeans when you can break it down into four monthly payments of $25? It's similar logic as utilizing a mortgage, just on a smaller scale. For companies selling goods and services, more sales have been made to people who may otherwise pass on buying for full price upfront. The business opportunity seems pretty clear.

So from a personal financial planning standpoint, where could it go wrong?

According to Reuters, one third of consumers using BNPL have fallen behind on payments, and many more have had credit scores negatively impacted. So there are some who simply cannot service these installment payments.  

There are also those who do have the ability to meet installment payments (thus enabling them to continue buying) but with no concept of how much is going out the door each month. A purchase here, a purchase there, next thing you know there's $300/month going out in installment payments indefinitely for various crap they don't need. There's too much spending relative to their income, and it's coming at the expense what should be other priorities. In this case, BNPL, in itself, could create some poor spending habits.

But the optimistic me says the following. BNPL users cannot continue shopping until any late installments are paid back. Credit cards on the other hand, will let you keep going and apply absurd interest charges along the way. BNPL provides great flexibility for consumers, but only if they hold up their end of the bargain due to these guardrails being in place. If someone has fallen behind on an installment payment, it (fingers crossed) can be treated as an active learning opportunity. "I'm spending more than I can support, so clearly I need to pay more attention to my cash flow." 

So if you're struggling to save, or prioritizing how to allocate capital, think twice about widespread use of BNPL. And in the words of Morgan Housel, more stuff doesn't equal more wealth.

"Wealth, in fact, is what you don’t see. It’s the cars not purchased. The diamonds not bought. The renovations postponed, the clothes forgone and the first-class upgrade declined. It’s assets in the bank that haven’t yet been converted into the stuff you see."

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^{Source: The Psychology of Money (Morgan Housel)}