“Buy now, pay later: Pay in 4 interest-free payments of $18.98 …”
This seemingly innocent, yet convenient phrase is popping up in online shopping carts everywhere. Given America’s deepening affordability crisis, the ability to break up purchases into smaller, more manageable chunks may be a lifeline for many consumers. But as the buy now, pay later industry continues to expand, it’s important to consider how these financing options may be affecting our decision-making while shopping.
What Are Buy Now, Pay Later Plans?
The Consumer Financial Protection Bureau describes BNPL as “a form of credit that allows a consumer to split a retail transaction into smaller, interest-free installments and repay over time.” In other words, BNPL plans are essentially loans for smaller purchases—usually ranging from $50 to $1,000.
Among the benefits of BNPL plans are their accessibility, ease of use, and affordability. Consumers can sign up for a BNPL program right when purchasing a product. The process typically asks the consumer for some personal information and payment details, which the lender processes as an application for credit. If the consumer is approved and their first payment is processed, then they have officially signed up for a BNPL loan. The entire process takes minutes and does not negatively affect the buyer’s credit score. The loan also does not charge interest on the purchase amount.
But not everything about BNPL plans can be cast in such a positive light. To start, consumers are increasingly using these plans for essential purchases like groceries and utilities. This may be a signal that these consumers may already be financially at-risk, which may be further multiplied by these products. Consumers who use these plans may also struggle to return products or dispute a service. Also, although plans don’t charge interest on the purchase amount at the outset, consumers may face late fees ranging from 0.0% to 29.7% if they miss a payment.
Studies also find that BNPL plans may affect consumers’ shopping decisions. For example, a study conducted by the Behavioural Insights Team found 50% of participants said they bought something they would have otherwise saved for, and 38% spent more than they planned because BNPL was available.
In fact, BNPL plans promote their product to retailers as a way to increase sales. Afterpay touts that their product delivers an “80% increase in average order value,” and PayPal boasts a “91% higher average order value than standard PayPal average order value for enterprises.”
To understand how BNPL plans can have such an impact on spending patterns, and thus why they may be considered dangerous, it may be helpful to look at them from the perspective of behavioral science.
Our Biases Can Work Against Us When Using BNPL Plans
Researchers have pointed to a few biases that may be behind the impact of BNPL on consumer behavior. For example, the drive to overspend when using BNPL may be related to hyperbolic discounting, which is our tendency to prefer the benefits of immediate payoffs compared with later ones, even if the latter outweigh the former. BNPL plans allow a consumer to enjoy the immediate benefits of their purchase, while postponing most of the pain of buying it to later payments. This delay may make purchasing more goods or spending more in general more palatable because we don’t feel the immediate pain of paying.
A form of optimism bias may also be at play. Consumers may be overly optimistic about the future flexibility of their budget, which may trick them into believing that it will be easier to make those payments at a later time.
One can even make an argument that social comparisons may be driving the uptake of BNPL plans. Consumers of all income levels may feel the pull to “keep up with the Joneses,” resulting in the need to use BNPL programs just to make ends meet.
How to Avoid Overspending This Holiday Season
At the end of the day, BNPL plans are just a tool. While there are plenty of pitfalls consumers can fall into when using them, that does not make them inherently bad. Instead, what can make BNPL programs problematic is how we, as consumers, use them.
Going into the holiday shopping season, keep these ideas in mind to steer clear of the danger of overspending:
- As mentioned earlier, one of the reasons we may opt to use BNPL plans is because we tend to be overly optimistic about our future budget. Going into the holiday shopping season, try to start with a realistic budget. Instead of just depending on routine spending items that come to mind (rent, groceries, utilities payments), try to consider the miscellaneous spending and surprise expenses that may arise. If needed, take a look at your spending for the previous month and sum up all the unplanned spending that took place. Try incorporating a sum similar to that total to gain a more realistic view of your future budget.
- BNPL users reported spending more and buying unplanned products while using the service. Try to avoid this trap by having a set plan ahead of time. Before stepping into a store or firing up those shopping sites, make a list to guide your decision-making—and even help you stay away from those tempting sales.
- If you opt to use a BNPL plan, note that each purchase is a loan, and usually paid back through automatic withdrawals from your bank account. Keep track of when and how much each payment will be, to avoid missing payments or incurring overdrafts.
- Sometimes, overspending is related to our desire to keep up with our peers. In these moments, it may be helpful to revisit your personal values and financial goals. As you face a world full of social factors, these goals and values can serve as your North Star to help guide your financial decisions. For example, during the holiday season, social comparisons may drive you to buy your nephews and nieces the best gifts so that you can be the best aunt ever (guilty!). However, a quick goal check-in can help you realize that what you value the most is quality time and building memories with family. This can help you forgo an expensive and unnecessary shopping spree and opt for a holiday baking and game night instead (along with a few, more reasonable presents, of course).