Naughty or nice: Buy now, pay later plans like Affirm, Afterpay

Nov 29, 2021

Simone Del Rosario Business Correspondent

By Simone Del Rosario (Business Correspondent)

Payment plans commonly referred to as ‘buy now, pay later’ are making a big impression this holiday season. But are Affirm, Afterpay and others a steal of a deal or a case of buyer beware? It depends on who you ask.

Think of buy now, pay later as the Gen Z version of an old-school layaway plan, except consumers get the product up front with the bulk of payments made weeks or months later.

The perks

Shoppers have always loved installment plans, from infomercials to loans for cars and homes. But now you can apply that concept to small, everyday purchases, and because these items are relatively cheap with fast payment schedules, they come with some big perks.

“These ‘buy now, pay later’ loans definitely have some advantages over credit cards, and No. 1 is that they’re often interest free,” said Matt Schulz, a credit card expert with Lending Tree. “That’s obviously really, really important to so many people whose financial margin for error is razor thin.”

Nearly 56% of American consumers have used a ‘buy now, pay later’ service in 2021, up from 38% the year prior. While almost any credit card alternative is attractive to this younger demographic, experts cite another reason providers like Affirm, Afterpay and Klarna are having their moment.

“I think that the simplicity, the transparency and the clarity of these ‘buy now, pay later’ loans is a big lure,” Schulz said.

In other words, shoppers should know exactly what they’re on the hook for instead of getting hit with unforeseen interest and fees down the road.

The problem

“Part of the danger of these loans is that they are really easy to get in a lot of ways,” Schulz said. “And when things are too easy to get, when people make it too easy for you to spend, that’s when people end up getting themselves in trouble.”

According to a 2018 survey on Afterpay, 65% of respondents said the ability to make smaller payments influenced them to make purchases they wouldn’t normally make. That’s why Millennial-focused financial advisor Douglas Boneparth said it actually creates bad financial behavior.

“Psychology is, I don’t have to pay for this all at once and I get to keep onto this money that I have here,” Boneparth explained. “And because of that you trick yourself into then going to buy something else and then buy something else.”

So that new Fendi baguette or Selkie dress from Revolve that seemed so extravagant suddenly doesn’t feel so out of reach.

“This definitely reaches down to impressionable younger spenders, who have pressures from social media: I need to look this way because of this filtered Instagram photo, now I can get that look right there on the app with a ‘buy now, pay later’ program built into it,” Boneparth said. “We’ve made it so easy to do that.”

What happens if you miss a payment? In most cases, you’re cut off from the payment provider, meaning no more buying until you settle your account. You can also be charged late fees from some providers but those are typically capped and detailed up front.

SIMONE DEL ROSARIO: YOU CAN NOW BOOK A FLIGHT TO ARUBA ON AMERICAN AIRLINES WITHOUT USING A CREDIT CARD, OR BUY A $2,500 PELOTON BIKE ON A PAYMENT SCHEDULE WITH NO MONEY DOWN, NO LATE FEES AND NO COMPOUNDING INTEREST. YOU CAN EVEN BUY A FRYING PAN AT WALMART AND YOUR GROCERIES AT TARGET WITHOUT PUTTING DOWN A DIME.

DOUGLAS BONEPARTH: WHAT’S NEXT, A $2 STICK OF GUM? YOU KNOW, 10 PAYMENTS OF 20 CENTS.

SIMONE DEL ROSARIO: WHAT WE’RE TALKING ABOUT IS COMMONLY REFERRED TO AS “BUY NOW PAY LATER.” AND IT’S MAKING A BIG IMPRESSION THIS HOLIDAY SEASON. IS IT A STEAL OF A DEAL? OR A CASE OF BUYER BEWARE?

THINK OF IT AS THE GEN Z VERSION OF AN OLD-SCHOOL LAYAWAY PLAN, EXCEPT CONSUMERS GET THE PRODUCT UP FRONT WITH THE BULK OF PAYMENTS MADE WEEKS OR EVEN MONTHS LATER. AND BUSINESS IS BOOMING.

SHOPPERS HAVE ALWAYS LOVED INSTALLMENT PLANS. WE’VE BEEN DOING IT IN SOME FORM WITH HOMES AND CARS FOR DECADES.

BUT NOW YOU CAN APPLY THAT CONCEPT TO SMALL, EVERYDAY PURCHASES, AND BECAUSE THESE ITEMS ARE RELATIVELY CHEAP WITH SUPER FAST PAYMENT SCHEDULES, THEY COME WITH SOME BIG PERKS. HERE’S CREDIT CARD EXPERT MATT SCHULZ WITH LENDING TREE.

MATT SCHULZ: THESE BUY NOW, PAY LATER LOANS DEFINITELY HAVE SOME ADVANTAGES OVER CREDIT CARDS. AND NUMBER ONE IS THAT THEY’RE OFTEN INTEREST FREE. THAT’S OBVIOUSLY REALLY, REALLY IMPORTANT TO SO MANY PEOPLE WHOSE FINANCIAL MARGIN FOR ERROR IS RAZOR THIN.

SIMONE DEL ROSARIO: NEARLY 56% OF AMERICAN CONSUMERS HAVE USED A BUY NOW PAY LATER SERVICE IN 2021, UP FROM 38% THE YEAR PRIOR. AND WHILE ALMOST ANY CREDIT CARD ALTERNATIVE IS ATTRACTIVE TO THIS YOUNGER DEMOGRAPHIC, EXPERTS CITE ANOTHER REASON PROVIDERS LIKE AFFIRM, AFTERPAY AND KLARNA ARE HAVING THEIR MOMENT.

MATT SCHULZ: I THINK THAT THE SIMPLICITY, THE TRANSPARENCY AND THE CLARITY OF THESE BUY NOW PAY LATER LOANS IS A BIG LURE.

SIMONE DEL ROSARIO: SHOPPERS SHOULD KNOW EXACTLY WHAT THEY’RE ON THE HOOK FOR, INSTEAD OF GETTING HIT WITH UNFORESEEN INTEREST AND FEES DOWN THE ROAD.

TOO GOOD TO BE TRUE? LET’S TAKE IT FOR A SPIN. I’VE HAD MY EYE ON THE NEW PELOTON BIKE FOR A WHILE AND IT JUST WENT ON SALE SO I THINK I’M GOING TO BUY IT. NOW, I COULD PAY THE ENTIRE $2,145 UP FRONT OR PUT IT ON MY CREDIT CARD AND DEAL WITH INTEREST.

BUT AFFIRM AND PELOTON TEAMED UP AND THEY SAY I CAN PAY AS LITTLE AS $50 A MONTH FOR 43 MONTHS WITH 0% INTEREST, SO LET’S SEE IF I QUALIFY. IT’S JUST A SOFT CREDIT CHECK SO IT WON’T AFFECT MY CREDIT SCORE.

BOOM. NOW I JUST HAVE TO MAKE THE PAYMENTS OVER THE NEXT 43 MONTHS. THAT WAS ALMOST TOO EASY. AND THAT CAN BE A PROBLEM.

MATT SCHULZ: PART OF THE DANGER OF THESE LOANS IS THAT THEY ARE REALLY EASY TO GET IN A LOT OF WAYS. AND WHEN THINGS ARE TOO EASY TO GET, WHEN PEOPLE MAKE IT TOO EASY FOR YOU TO SPEND, THAT’S WHEN PEOPLE END UP GETTING THEMSELVES INTO TROUBLE.

SIMONE DEL ROSARIO: ACCORDING TO A 2018 SURVEY ON AFTERPAY, 65% OF RESPONDENTS SAID THE ABILITY TO MAKE SMALLER PAYMENTS INFLUENCED THEM TO MAKE PURCHASES THEY WOULDN’T NORMALLY MAKE. THAT’S WHY MILLENNIAL-FOCUSED FINANCIAL ADVISOR DOUGLAS BONEPARTH THINKS IT ACTUALLY CREATES BAD FINANCIAL BEHAVIOR.

DOUGLAS BONEPARTH: THE PSYCHOLOGY IS, I DON’T HAVE TO PAY FOR THIS ALL AT ONCE. AND I GET TO KEEP ONTO THIS MONEY THAT I HAVE HERE. AND BECAUSE OF THAT YOU TRICK YOURSELF INTO THEN GOING TO BUY SOMETHING ELSE AND THEN BUY SOMETHING ELSE.

SIMONE DEL ROSARIO: SO THAT NEW FENDI BAGUETTE OR SELKIE DRESS FROM REVOLVE THAT SEEMED SO EXTRAVAGANT SUDDENLY DOESN’T FEEL SO OUT OF REACH.

DOUGLAS BONEPARTH: THIS DEFINITELY REACHES DOWN TO IMPRESSIONABLE YOUNGER SPENDERS WHO HAVE PRESSURES FROM SOCIAL MEDIA. I NEED TO LOOK THIS WAY, BECAUSE OF THIS FILTERED INSTAGRAM PHOTO. OW I CAN GET THAT LOOK RIGHT THERE ON THE APP WITH A BUY NOW PAY LATER PROGRAM BUILT INTO IT. WE’VE MADE IT SO EASY TO DO THAT.

SIMONE DEL ROSARIO: AND THE EASIER IT IS – THE EASIER IT IS TO GET INTO TROUBLE. OKAY SO WHAT HAPPENS IF YOU MISS A PAYMENT? IN MOST CASES, YOU’RE CUT OFF, NO MORE BUYING UNTIL YOU SETTLE YOUR ACCOUNT. YOU CAN ALSO BE CHARGED LATE FEES FROM SOME PROVIDERS, BUT THOSE ARE DETAILED UP FRONT. WHAT DO YOU THINK? WILL YOU BUY, NOW AND PAY LATER THIS HOLIDAY SEASON? LET ME KNOW IN THE COMMENTS.