The idea of buying something now and spreading the payments out isn’t new, but is it a helpful or harmful option for your financial well-being? Let’s explore.
Department stores used to call them layaway plans. What has changed with the Buy Now, Pay Later (BNPL) model is the speed in which you can get a plan. Many stores offer this feature and it’s both easy and quick to get approved. All you need to do is complete a short online form, attach it to your credit card or bank account, and you’re ready to go. BNPL isn’t necessarily a bad idea— it can help with cash flow and budgeting, but it does have risks. Here are three things to be aware of before you decide to take the plunge.
1 - Who we think we are in our minds, especially when it comes to money, isn’t always the same as the way we behave with money. This means that we can rationalize spreading out a purchase into four smaller payments by thinking it will help us budget, and it may convince us we have
a little more money for right now. Sound familiar? Sometimes we spread out payments because we can’t afford the purchase all at once. But what happens if that thinking is a bit off? If we miss a payment, for example, even with the best intentions. Read the fine print. You need to understand what happens if you miss a payment. What is the penalty, and how much will it cost? Are you really saving if that happens?
2 - The temptation to spend more money is real. Sometimes that little voice in your head does its own calculations, telling you that because you’re spreading out payments, you can actually spend more. Perhaps your intention was to only spend $400 but now that you can spread the payments out into $100 monthly, “technically,” that voice says, you can afford to buy a more expensive product. One of the best ways to counteract that voice is to be aware of those machinations. Welcome your inner mathematician and then ask it to relax and go play with a calculator while you make a sound decision based on your real financial facts.
3 - Be aware of the impact on your credit. Many BNPL plans don’t conduct a credit check during the application process; however, they will report to your credit bureau. Understand that if you miss a payment, this will negatively impact your credit score, so be sure you can afford to make each and every payment in the coming term.
Financial products, mostly anyway, are neither good nor bad. The way we use them determines whether their effects are positive or negative. Think hard before using the Buy Now, Pay Later feature and use caution. Your future self will thank you for it.