Buy now, pay later companies…They’re everywhere these days. From my magazines to TV ads, I can’t escape it. I’ve got quite a few thoughts on it too, which has snowballed over the past few months amid my busy summer juggling life and grad school. Here’s the kicker: it’s not all it’s cracked up to be, and here’s what you need to know before taking part in it.
Whoever said buy now, pay later was a way to budget smartly was seriously disturbed! I share much more horror for this as Elle Woods did for the color orange, and here’s why. Taking on debt for consumer purchases is never a good investment. Over the past 5 months, while I was finishing up my MBA, I was horrified by the number of influencers and companies coming out of the woodwork in TV ads making this kind of behavior seem cool and responsible. I had so many emotions and thoughts on the subject but hadn’t had the time to write them all down until now.
Studies show that Gen Z and Millennial shoppers have a higher affinity to shop on credit. Quit falling for this predatory ploy. While it seems almost innocent since many are capped at 4 payments, there’s much more to the story once you take a deeper look at your consumer purchasing/personal finances.
The Actual Business Model of Buy Now, Pay Later
No fees, all good right? Not exactly. Someone is paying, it’s basic economics. Businesses like Klarna do not charge the consumer. They charge the retailer as a third-party payment provider. Why would retail stores pay someone to take consumer money? A simple stat: orders paid through these types of services allow for at least a 44% increase in overall orders, and a 68% increase in order volume (aka, adding more than you would normally to your cart). They also have multiple streams of revenue that profit on the backs of those that carry the balance longer. A bit predatory, do you think? What would you put back if you knew you didn’t have the budget for? It makes it more clear exactly how this can spin out of control REAL QUICK.
But it has no interest, isn’t that better?
This is the biggest part of the foolery. I bet you likely try to pay with a credit card to gain points on purchases, or to save your bank account the hit upfront. Your card still has an interest rate, and even if you have a great credit score or a low-interest card, carrying the debt will still have a cost. Mine on my Sapphire Reserve/AMEX Gold is around 17% with an ~800 credit score, which is still A LOT. In simplest terms, you are BUYING that money to use at the interest rate. It then becomes a slippery slope: you begin to add more items to the shortened tab, and months later, it’s snowballed into hundreds of thousands of dollars. This can be extremely hard for a young shopper to learn how to use wisely. Is it morally wrong? No. Is it irresponsible in most cases? Absolutely. It’s breeding poor spending habits that will bite you in the ass later.
There are also other options for consumers beyond the seemingly harmless no-interest 4 payments. This includes the pay-in-30-days model. If the payment isn’t settled in this time period (you lose your job/etc), you’ll get tagged with up to 29.99% interest as you settle it out over 36 months. That’s an insanely high rate for those new to credit cards. The wise decision? Budget for what you need AND want, but make sure you have the funds to cover it upfront.
So what’s a responsible alternative?
Actual budgeting. Actual number crunching of your daily use products and seasonal clothing. Nothing works better than good old-fashioned budgeting in my opinion. It’s saved me thousands of dollars per year once I got a bird’s eye view of my consumption AND spending. The money multiplier? Seasonal sales, and budgeting accordingly, namely for beauty products. I put it into my own excel model to determine exactly how much I need on a seasonal basis, and shop accordingly. Here are the variables to track in your own journal to get an idea of your current spend:
Shelf Life: How long it takes to run out of a certain product (seasonally)
Add up the total bottles you need annually and split up by seasonal sale
How many times you make one-off purchases of these daily use items at full price
The annual total of how much it would cost to purchase these items on sale seasonally
Subtract the 3rd from the 2nd to see how much money you could have saved
Fashion can be a bit more tricky, but nonetheless, equally important to track. Fashion is, unfortunately, the most depreciating of the two main consumer groups, which is why I focus on building a wardrobe of staples and supplementing with a rental company for trendy seasonal items. Not to mention, it’s more sustainable. Many of the buy now pay later companies are on fast fashion sites that are making the problem worse. Take a long hard look at your budget and needs before clicking order!
Was this post helpful for you, and do you want more industry insight/budgeting tips for your beauty and fashion purchases? Let me know in the comments, and we can make this a full series!
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