The Dangers (And Advantages) of 'Buy Now Pay Later' Services

A couple weeks ago I tweeted this out:

"Buy now pay later services are wildly dangerous, but they're also way better than credit card debt. Need to write something about this 🤔"

Buy Now Pay Later is "a type of short-term financing that allows you to make purchases and pay for them at a future date, often interest-free" - it's kind of like layaway.

But the tweet was inspired by my latest purchase of an iPad Air that I didn't want to pay $700 upfront for.

With having an Apple Card, I could finance the iPad for 12 months with 0% interest.

It felt like a no-brainer.

I can pay the exact same amount as buying it in full but rather than pay it all at once, I can just spread the payments over the next year at like $65/month.

The service itself is great.

But the mindset it can create around spending is not so great.

However, the nice thing about 'buy now pay later' services is that they're a lot better than credit card debt - A LOT better.

With credit cards, if you don't pay off the balance every month, you get charged insanely high interest rates. Sometimes 25% or more.

With Buy Now Pay Later, you can have a $1,000 balance but rather than being charged interest, you agree to pay off that entire balance over a certain time period, such as 12 months, at no additional (or very minimal) cost.

Within the past two months, the following acquisitions have happened:

  • Amazon acquired Affirm
  • PayPal acquired Paidy
  • Square acquired AfterPay

Three large companies have all acquired 'buy now, pay later' service platforms. This means it's going to become even easier to finance purchases and I think this is going to lead to people having severe cash flow problems.

Why?

Because every time you use a 'buy now pay later' service, you're raising your minimum viable spending. Your minimum viable spending is the amount of money that you need to spend each month to keep up your current way of life.

For example, my monthly spending prior to the iPad purchase was about $1,700/month. Now, it's almost $1,800.

(I had to get the Apple Pencil too.. so tack on another $10 to the monthly payments ✏️)

Now, I also want to get the new iMac because my laptop sounds like an airplane taking off every time I try and do anything more than opening Chrome.

Could I afford to buy an iMac straight up? Nope 😔

Could I afford it by financing it for a year? Kinda 😬

And this is what's dangerous.

Even though you may be able to afford something by financing it doesn't necessarily mean you can truly afford it.

By slowly increasing your monthly spending, you're inching closer and closer to getting in a financial bind.

The most important principle in personal finance is almost so simple that I don't like saying it:

Spend less than you make

By doing this, it's hard to get in a bad spot financially. If you're able to spend less than you make, you'll be in a better spot than a vast majority of people.

And if you use a BNPL service and you're still spending less than you make, it's not necessarily a bad decision to use it.

It all comes down to your own personal situation.​

I like to consider a couple questions before using a Buy Now Pay Later service:

Can I actually afford it and the BNPL is just convenient? Or am I living beyond my means?

Is this purchase providing some sort of return?

Now, I'm not opposed to Buy Now Pay Later services. I actually think they're a good thing for our generation because it can easily help people avoid expensive credit card debt.

However, these services aren't a free pass to spend more than you make.

Before using buy now pay later to purchase something, take a look at your monthly spending, make sure that the new payments won't push you past spending more than you make, and if it's something that you truly want to purchase, go for it.

Money's meant to be enjoyed, but it also needs to be managed carefully.

By taking a few minutes to think through your situation and review the effects of a purchase, you can begin spending money and be financially responsible at the same time.

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