By Peter Mastrantuono
Wall Street was abuzz with the announcement by Square, a digital payments company, that it had reached a deal to acquire Afterpay Ltd., a “buy now, pay later” business for $29 billion.
Square’s acquisition is a recognition that buy now, pay later (BNPL) apps are gaining the attention of an increasing number of consumers. Which leads to a timely question, “Is BNPL financially smart for Americans?”
What is BNPL?
BNPL is an old concept that allowed consumers to buy a product and take it home today without making any payments or being charged for any interest for a prescribed period of time (“No payments until the new year!”).
The more modern version involves the use of financial technology apps that offer wider payment choices and transparency around the payment schedule and interest payments.
There are three basic loan types offered by BNPL providers: 1) traditional fixed interest loan, whose term period may range from 3 to 36 months and whose interest may be anywhere from zero to 30%; 2) Pay for a purchase in four equal installments at zero interest due every two weeks, with the first payment due at purchase; and 3) pay within 30 days of purchase and no interest will be charged, similar to a credit card.
Does BNPL Make Sense?
Individuals that buy big-ticket items for which they may not have ready cash do so for two basic reasons: an emergency (the washer just broke down) or for convenience (an HDTV for the Super Bowl). Until now, the most likely way individuals funded these purchases was via a credit card, which offered flexible payments but at very high interest rates. BNPL is the new alternative.
There are several advantages to consider a BNPL approach:
- Helps individuals make needed, sometimes unexpected, big-ticket purchases.
- The no-interest options allow for more convenient payments at no cost.
- Payments can be linked to a debit card or bank account.
- May be a more affordable alternative to traditional credit cards.
- Fast approval on loans.
There are a number of disadvantages, as well:
- They can encourage overspending since small monthly payments are much easier to digest than one large lump sum payment.
- Missing payments can trigger high fees and penalties.
- Since many of these companies don’t report to credit bureaus, consumers won’t receive the credit for making payments on a timely basis. They do report missed payments however!
- The consumer has no input on the payment due dates.
- These services are not subject to the same oversight of credit cards or other personal loans.
- Numerous small loans can become difficult to track and budget for.
Like so many things in life, BNPL may be useful and valuable in moderation, but when used to make regular, everyday purchases it may result in overspending that can be harmful to long-term wealth accumulation goals.
Consequently, it may be beneficial to return to the timeless basics of sound financial planning by working with your financial advisor on a budget and investment plan that allows you to properly balance the needs of living today with the imperative of planning for tomorrow.
Next week, we’ll examine various BNPL apps and discuss how to evaluate them to find the one that best fits your needs.
Peter Mastrantuono is a contributing writer to MyPerfectFinancialAdvisor, the premier matchmaker between investors and advisors. Peter worked for over 30 years in the wealth management industry, focusing on retirement planning, investing, asset allocation and financial planning.
