What is Buy Now Pay Later and is it Bad?

Here's a question we get quite often:

"I was pretty cash-strapped this holiday season and ended up buying a lot of my gifts using Klarna and Afterpay. Was this the right decision? Are there any downsides to using these options?"

Buy Now Pay Later (BNPL), as the name implies, is a payment option in which you pay for a product in installments over a set period, as opposed to the full cost upfront.

Imagine if you were to buy a chocolate bar worth $5. Normally, you'd excitedly put it down on the grocery store counter, and hand the cashier a $5 bill in exchange for the sweet treat. However, if you paid for the chocolate bar using BNPL, it would look something like this:

1. Pay $3 upfront as a down payment for the chocolate bar
2. Pay $1 at the end of the week towards the chocolate bar
3. Pay $1 at the end of the next week towards the chocolate bar

In total, you would have still paid $5, but you get the chocolate bar immediately, without having to pay the $5 in full immediately. On a completely practical level, this is great because it's much more convenient for you. If you use BNPL on a larger purchase like a car, you could pay a bit of the cost each month, which is much more doable than a one-time payment if you don't have any savings.

The Downsides

Salespeople aren't charitable by nature... so why offer BNPL as a payment option? Well, 55% of consumers spend more when given the option to use BNPL, which is great in terms of sales revenue.

When payments are spread out over a long period of time, they tend to have less psychological impact than large one-time purchases. For example, you're paying just $13.99 a month for Netflix, which is not much until you realize that's $167.88 a year! BNPL purchases don't feel as expensive as their total cost, which usually causes you to spend more.

Any Upsides?

Generally speaking, the only situation in which you should choose BNPL is necessities that you couldn't finance with a one-time payment. For example, if you need a car for a 2-hour long commute and other options such as carpooling are unavailable, using BNPL is a good idea. In this case, you need to spend money on your commute in order to make money for a living.

As with all purchases, ask yourself if they're truly necessary, and always consider cheaper alternatives. For BNPL in particular, always be wary of the total cost of the purchase to make sure that you're not spending above your means.

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