Published on November 23, 2022

Buy now, (over)pay later

Human irrationality is a common topic in my articles.  One reason is that I am an economist and we love irrationality!  More importantly though, people are particularly foolish when it comes to money.  A particularly dangerous human quirk is something called ‘discounting the future’.  Simply, we value the present moment way too much.  Technology is making this problem worse, and we are increasingly losing our ability to plan for the long term. 

The rapid growth of ‘buy now, pay later (BNPL)’ options is evidence of this trend.  (The number of BNPL users is projected to hit 59.3 million by the end of this year!)  BNPL is a short-term financing method that allows borrowers to make purchases and pay for them through (supposedly) interest-free installments. The loan is generally offered by a third party when you pay for a good/ service.  Paypal, Affirm, Klarna and Afterpay are all big players in this field. 

On the face of it, there appear to be few disadvantages.  And it certainly appears cheaper than using a credit card. But as always, appearances are deceiving. Companies would not be offering it to you if they weren’t making money OFF you.  Also, unlike credit cards, on time payments do not help build up your credit score.  If you miss a payment though, it will most definitely pull your credit score down. 

This is not the only problem with BNPL.  Platforms have different return, late fee and interest policies. It is therefore important to research the platform before you buy.  (This is also why it is a bad idea to use it at a till.  If you are shopping online, at least have the time to dig up some data before you click.)  Although Paypal, Klarna and Afterpay don’t charge interest initially if you spend over a certain amount, they have quite a tight repayment schedule.  Affirm charges between 0% and 30% depending on your credit.  Returns are tricky on most platforms.  You will probably not be refunded any interest payments AND you may wait longer for your casch.  

Hidden fees are not the main reason I am concerned about BNPL though.  Back to that future-discounting thing I mentioned in the first paragraph.  If you do not have the cash today to buy something, you probably cannot afford it.  If it is a true need (say a replacement fridge), BNPL might be a better option than a credit card IF you can make the often larger future payments on time.  But for all those wants (electronics, vacations) it is a bad idea.  Unless you are about to get a raise or start a higher paying job, your cash flow in the future will be the same as it is now.  If you can’t afford it now, you won’t be able to afford it then, and you will fall deeper into debt.  A far better option is to do the modern version of a law-away.  Open a second savings account at your bank (you can do this simply at Greenwood) and transfer money at regular intervals into this account.  When you have saved enough, make your purchase! Unlike with BNPL, you will actually be earning real interest, not paying it, especially if inflation decreases.  Plus you will enjoy that good or vacation so much more, knowing that you have already worked the hours to earn it!

Greenwood is a financial technology company, not a bank.  Banking services provided by Coastal Community Bank, Member FDIC. Deposits are insured up to $250,000 per depositor.


About the Author:

Krista Tuomi, Professor in the International Economic Policy program at the School of International Service, American UniversityKrista Tuomi is a professor in the International Economic Policy program at School of International Service, American University. She has worked for many years as a policy analyst in the areas of innovation and investment. Her regular Bizwomen column, media interviews, and research focus on topics that include angel investing, crowdfunding, non-profit management and fundraising. 

She also conducts workshops in the US and abroad on all forms of small business and non-profit financing. Her passion for the field of innovation and entrepreneurship extends to her pro-bono work.

Currently, she works with SCORE, Greenwood, Boots to Business, Martha’s Table, Black Girl Ventures, Syracuse’s Institute for Veterans and Military Families, and the Angel Capital Association.