‘The devil doesn’t come dressed like a wolf, he comes as an innocent lamb” Anon
You most likely have come across the Buy Now, Pay Later schemes, or BNPL as its now colloquially called, given that apparently 57% of Gen Xers and 40% of Millennials use these services.
Names like Klarna, Clearpay, Affirm and Paypal may be popping up on your radar a lot more these days as they attempt to entice you to give it a try. They basically offer you the ability to pay for an item via instalments over an extended period, generally 1 to 12 months, often without incurring any interest or impacting your credit score, as long as you make the payments as required.
And this does look like a very tempting offer, although maybe a bit like those to “good to be true” kinds, so let’s delve beneath the surface just in case this is the proverbial wolf come to bite us on the butt!
Let’s start by looking at the benefits
The most obvious if of course that you don’t have to pay the full purchase price upfront and get the opportunity to try before you buy. It brings the whole changing room experience to you and doesn’t involve having to wait for a refund on your debit or credit card if you choose to return the item and do so before the first instalment is due.
As I mentioned earlier many of the BNPL scheme don’t require a hard credit check for you to qualify for them, so they won’t hurt your credit score.
And this is possibly where the wolf’s teeth start showing
On that note, let’s look at the risks
It’s not difficult to see that these plans could entice customers to spend more than they would if they had to pay upfront. This creates the very real risk that we will overspend on impulse purchases.
Many consumers have found the terms and conditions not to be 100% clear given that these plans are all about the ease of use and getting the customer too transact without any bottlenecks that may provide an opportunity to reconsider.
This coupled with a financial literacy gap means customers have been surprised to find out the significant consequences of not repaying as required; including the interest charges at rates of between 19.9% and 34.9% on late payments and the not insignificant negative impact on their credit score and financial reputation.
So is BNPL a wolf in sheep’s clothing?
If used sensibly, BNPL could remain a sheep, although with a wolf’s heart if not managed correctly.
It offers a convenient interest free money management tool. But convenience comes with the price of having to be a bit more vigilant around that money management.
Some key things to think about before deciding to dive in and indulge are that;
- you do in fact have the money available to repay when due,
- you are clear on the other upcoming financial commitments you have pending, and
- you don’t get enticed to overextend yourself by only considering the affordability of the individual instalments as opposed to the full amount you are going to have to repay.
If you cannot hand on heart tick all these boxes, beware there IS a big scary wolf behind that very alluring sheep’s face.
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