In years gone by, if you wanted to buy that shiny new object from the store, you had to save up the money just like your parents or grandparents once did.
Things have changed for the current generation of shoppers, and buy now pay later is all the rage. Buy now pay later companies offer shoppers the ability to buy a product now, and pay for it later, usually in a series of instalments over the following few weeks.
The process is similar to making a purchase on a credit card with an ‘interest-free’ period. You receive the product or service upfront, but don’t get charged interest for it until the ‘interest-free’ period runs out, which could be anywhere from approximately 30-45 days depending on the company.
So, while it’s easy and clearly popular at the moment, is buy now pay later really worth it?
By far the largest users of buy now pay later are Millennials, who have grown up in the era of instant gratification – getting something straight away without having to pay for it until later.
Buy now pay later companies simply require you to register your details online without credit checks and you can then buy quickly and easily through the online checkout process, or even in person when shopping at a traditional “bricks and mortar” store.
The big advantage is that buyers are able to get their products straight away without the need to pay cash or use a credit card. Credit cards are great, but can attract high rates of interest if you don’t pay them off on time. This can quickly put buyers in a tough position.
If you pay on time, buy now pay later companies won’t charge you interest on your purchases, they will simply deduct instalments over the following few weeks after the purchase.
While buy now pay later might have a lot going for it at first glance, you also need to look at the other side of the equation.
Despite the fact that buy now pay later companies generally don’t charge interest, they will charge you a fee if you miss a payment. This fee might be as little as $10, which could occur if you don’t have the balance in your account to pay for an instalment.
While that amount seems minor, there is data to suggest that buy now pay later companies make a good portion of their profits from that late payment fee. That suggests that the vast majority of people using these companies, probably can’t afford the products they are buying in the first place.
Most buy now pay later companies also don’t let you choose how and when you make your payments or instalments. That can leave you at risk of not being able to make a payment when required to do so and you’ll be charged a fee. If you miss a payment, these companies will quickly limit the amount you can spend in the future, so it is a dangerous game if you can’t afford it in the first place.
It also raises another issue. If you can’t afford something, should you really be buying it? The idea of buying on credit is great, but it is creating bad spending habits that will be tough to shake.
If you ever want to buy a house in the future, virtually all lenders are going to require that you put up a sizeable deposit. The main way to get this deposit is to save for it. So, not buying on credit and learning to save for your purchases is an important skill to learn that will serve you well for the rest of your life.
While buy now pay later companies don’t require a credit check and don’t access your credit file, you can be sure that future lenders will be scrutinising your expenses and won’t generally look favourably on these types of purchases.
Lenders could assess the money you owe as a line of credit which will impact the amount of money you can borrow. It’s the same sort of thing as having a credit card. Even though you might never use your credit card, a lender will still assume that you have that credit available and will assess it as though your card is maxed out. So, your capacity to borrow will be reduced.
Lenders need to be satisfied that if they lend money to you, you will be able to pay them back without significant hardship.
A way to look at your debts is whether they are good debt or bad debt. Good debt is debt that will ultimately make you money in the long-run and help improve your credit rating. Taking out a mortgage to buy a home is an example of good debt. You’re buying an asset that will appreciate in value over many years.
Taking out a credit card for online shopping or using buy now pay later is an example of bad debt, as those purchases lose value instantly and you’re stuck paying them off – with high rates of interest and fees. At the same time, those debts will make it more difficult for you to borrow in the future, should you actually want to use some good debt to buy an appreciating asset such as a house.
Like anything, if used the right way, buy now pay later can be useful but, for the most part, if you take into consideration the pros and cons, you are probably better off saving up just like your parents or grandparents did.
Disclaimer: The information above is of a general nature only and does not consider your personal objectives, financial situation or particular needs. You should consider seeking independent legal, financial, taxation or other advice to check how the information relates to your particular circumstances. We do not accept responsibility for any loss arising from the use of, or reliance on, the information.