Gonna Buy Now Pay Later? Here’s How To Do It Safely

If you couldn’t sense the burning hatred in the subhead, there are some pretty strong reasons why BNPL is not great for your personal finances. But with the cost of living so high, there's a reason Gen Z and Millenials are so drawn to BNPL services.

So here’s how to do it safely.

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First off: what is BNPL?

In case you’ve been living under a rock and you hadn’t heard of it before (Asking for a friend...where is this rock?) BNPL stands for Buy Now, Pay Later.

BNPL companies include  AfterPay and Klarna. Those are the big names, but more and more banks and payment providers, like Paypal and Apple, are offering similar services.

Normally if you’re buying something online, you just pay the retailer directly in full. With BNPL service, they pay the retailer, and you pay them back in bi-weekly installments.

So technically you’re not saving any money, or paying more money—you’re just spreading out the cost.

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So how do BNPL companies make money?

Most Buy Now Pay Later services make money by taking a percentage of the transaction from the retailer as well as through late fees.

It’s beneficial for retail companies to work with BNPL companies because customers (@ you) are more likely to make the purchase with BNPL rather than paying in full. In fact,  ⅓ of BNPL users have reported increased spending. It’s the kind of basic shopping psychology that would stand in the Legally Blonde court.

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This is where the problem comes in. (The fact you spend more, not Legally Blonde - great movie)

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Why BNPL?

For large, one-off purchases like a phone, there are some benefits to the whole BNPL thing.

Christine Roberts of Citizens Bank told CNCB that when it comes to expensive purchases, “this generation very much wants to understand the time frame of payments.”

“The pay-over-time option allows it to fit into their budget and to know when the payments are going to end.”

This is in contrast with credit cards, which calculate a minimum monthly payment based on the overall card balance rather than individual purchases.

What’s more, Roberts shared that Gen Z and millennials are drawn to this transparency because “many watched their parents struggle with credit card debt amid the 2008 economic recession.” (The difference with this recession however is that we are no longer simply vibing in middle school but actually have to consider its impact on our finances.)

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The risks: Microloans are driving Millennials and Gen Z into Debt

18% of consumers aged 18-29 fell behind on BNPL payments in 2021, according to a Federal Reserve report. In a recent article, Bloomberg shared the story of Sarah Pfefferle, who had already saved $16,000 for her future home by the time she was 18.

Then she started using buy-now, pay-later products and “ruined everything.” In just two months, Pfefferle racked up $5,000 in debt across three of the installment-loan firms. The ballooning balances, as well as unexpected medical costs, drained her savings.

Pfefferle contacted a financial advisor, but the damage was done: her credit score dropped to 580 from 720.

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We have a whole article on Klarna and credit. The long and short of it is that some BNPL providers don't help build credit, but late payments can certainly damage your credit score.  

Although, major credit card bureaus like Equifax, Inc. and Experian Plc have said they’ll start including BNPL purchases on consumers’ credit reports. Which could help build credit…as long as you stay on top of payments…

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The alternative: How to use BNPL safely

🌟 Be selective 🌟

The reality is that sometimes you need to buy something urgently, and spreading out payments is the only realistic way to do this. The risk comes when multiple seemingly small payments accumulate. So be selective with what you choose to use BNPL services for.

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🌟 Track your spending 🌟

Track your repayments in your monthly budget, so you can see how much is due to leave your account each month.

📍 This could be in your notes app (although that probably carries enough of your emotional baggage without adding personal finances)

📍 On paper (if you also carry around a little candle stick at bedtime like the small Victorian man you are)

📍 Or with a budgeting app like Cleo.

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Obvi, we’re gonna plug Cleo here, because we think it’s a great budgeting app. You can track your outgoings, and Cleo will automatically sort them into essential and non-essential. She’ll even give you a visual complete with cute gold coins so you can see how much you’re left with to spend per day.

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Big love. Cleo 💙