Don’t be put off by “buy now, pay later” plans

Like kids of any age, I loved cartoons when I was a kid.

But as a kid who cared about money, the quirky comic book character who always intrigued me — even though he spawned love-hate feelings I’ve only recognized for decades. later – was J. Wellington Wimpy, generally known as Wimpy, from “Popeye”.

He wasn’t a heavyweight action hero, living up to his drawling image.

I loved his one-liners and quick thinking, which was apparently always about the money.

Wimpy would be “happy to pay you Tuesday for a burger today.” I watched him scramble to pay for things, get items for free just promising to pay for them eventually.

And then I realized he probably never paid for them down the line. Even though his intentions were good, it made him a mooch, a behavior I never admired at all.

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Fast forward to today, and that’s why I’m understandably skeptical of buy now, pay later (BNPL) programs that have become increasingly popular in recent years, with larger carriers seeing their activity increase tenfold or more since 2019.

What seemed mostly innocuous – most BNPL loans range from $50 to $1,000 – as an alternative form of credit for online purchases now looks different in the harsh light of runaway inflation and rising interest rates.

Consumers have easily adopted the Wimpy persona – volunteering to pay soon for the item they want to buy today – without even thinking about the consequences.

Still, BNPL is a Venus finance flytrap: beautiful to look at and terrible to get too close to, and chances are the upcoming holiday season will prove it.

Unlike the old cartoon shambles, the punch in the mouth that some consumers, and the economy more broadly, will suffer will be no laughing matter.

In the days of Wimpy, BNPL was known as “Layaway”. The main difference is that layaway plans – still available today – don’t deliver product until everything is paid for.

BNPL plans are an interest-free form of credit that offers the consumer the product now, with the loan usually repaid in four instalments. The first payment works as a down payment on the purchase, and offers are subject to late fees if subsequent payments are missed.

These programs have been legitimized by retailers pushing them to the point of online payment. Borrowers tend to be younger and lower income, although many users have credit cards and other payment options. Instead, they gravitate to BNPL because they like to know exactly what they owe, how often, and for how long.

In addition, this financing is generally easy to obtain and quick; applicable interest rates vary widely, and although consumers tend to think they’re getting a good deal, the fine print is the only place to confirm whether rates are better than those available on credit cards.

But Hugh Tallents, a senior partner at cg42 – a consultancy that examines competitive strategies – said BNPL is “nothing more than a payday lender disguised as something that shouldn’t be in a tech company”. .

This comparison should make consumers wary, as payday lenders – which provide very short-term loans with easy approvals but outrageous interest rates – are widely seen as predators, trapping borrowers who cannot meet the payments in a cycle of underwriting new loans to repay. the elders. Their offers may bridge the gap with the next payday, but often widen the money pit a consumer faces later.

BNPL is particularly dangerous because, according to a recent cg42 survey, almost 80% of consumers do not feel that the programs actually involve debt.

A layaway plan is not a debt because the product is not purchased until the last payment. With BNPL, borrowers have taken on an obligation.

“People are spending future paychecks they haven’t earned and have no guarantee of earning in an environment where inflation is still high. Wages are still well below that inflation, and we’re starting to see layoffs and hawkish Fed policy that aims to create additional unemployment,” Tallents said during an interview on my podcast, “Money Life with Chuck Jaffe,” earlier this week.

“So it all boils down to the idea that it’s not going to be a good situation for people, especially young people who depend on it to supplement how they live their day-to-day lives,” Tallents added.

The problem is that BNPL can be habit-forming. Who doesn’t like Wimpy’s approach when they can get away with no perceived cost?

But if consumers start paying this way now – at a time when they can afford these things – there’s a question of what will happen if they continue to mortgage future incomes as the environment turns hostile. to such behavior.

Expect more fees, charges, and penalties — just like credit card issuers did when this industry first emerged — and more consumers turned down for credit. If you are having trouble with any BNPL service or product, submit a complaint online to the Consumer Financial Protection Bureau at consumerfinance.gov or call the agency at (855) 411-2372.

Since BNPL loans are relatively new and have not experienced an inflationary winter before, their impacts on the wider economy will be difficult to measure, but Tallents expects a bubble in BNPL debt erupts this winter, fueled by heavy use of the programs over the holidays and until regulations control growth “and/or the wheels fail for the consumer.”

Unfortunately, the people most affected by the problem will be those who can least afford it.

If you haven’t handled credit cards and debt well in the past, don’t be fooled by BNPL.

It’s the loosest way – literally and figuratively – to handle money, and you’d better eat your financial spinach and stay strong against anything that would encourage overspending and overextending credit in today’s inflationary market.

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