Rich Girl Roundup: When to Avoid “Buy Now, Pay Later”—And When It Makes Sense

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More than 50% of American adults surveyed by The Motley Fool used "Buy Now, Pay Later" in 2021 and 2022—it's a common short-term financing option to make bigger purchases. So when should you use it, and when is it worth avoiding?

Welcome back to #RichGirlRoundup, Money with Katie's weekly segment where Katie and MWK's Executive Producer Henah answer your burning money questions. Each month, we'll put out a call for questions on her Instagram (@moneywithkatie). New episodes every week.

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Our show is a production of Morning Brew and is produced by Henah Velez and Katie Gatti Tassin, with our audio engineering and sound design from Nick Torres. Devin Emery is our Chief Content Officer and additional fact checking comes from Kate Brandt.

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Transcript

Transcript

Katie:

Welcome back, Rich Girls and Boys, to the Rich Girl Roundup weekly discussion of the Money with Katie Show. As always, I'm your host, Katie Gatti Tassin, and every Monday morning Henah and I dig into an interesting money question, discussion, conundrum, you name it.

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All right, before we get into it, this week's upcoming main episode is about aligning your financial and life goals for 2024. With some step-by-step exercises that I personally do every year, so I'm letting you into my process, and in anticipation of this year's Wealth Planner drop on Friday, which it feels really exciting that we're finally here and suspiciously low stress. I feel like I should be more worked up than I am.

Henah, how's your stress this week? How are you feeling?

Henah:

I'm feeling good. Actually, you'll be really proud of me. I have it on my calendar when the episode goes live to do a 2024 reflection with myself for my own life.

Katie:

Hell yeah, we love.

Henah:

But I have a question for you to kick us off today.

Katie:

Okay.

Henah:

Have you ever used a payment plan for a big purchase?

Katie:

No, but I tried when I bought my SoulCycle bike. I was like, "Oh." I think that was like $2,500, it was a lot of money all at once, and I thought, "Oh, they're offering 0% financing over..." I think it was 12 months. I was like, "Why not?" But my credit is frozen, and so it kicked me off and I truly was too lazy to go through the process of unfreezing my credit to let them run a credit check. I was like, screw it, I'm just going to buy it in cash.

But I think I would've, in that instance because it was truly just a, "Oh, so I can continue dollar cost averaging and I'm not diverting a ton of money right away from my investments," but I think it's a slippery slope, we'll say.

Henah:

It is indeed.

This week's question came from our coworker, actually, Kaibria, shout out Kai. She asked, "Is Buy Now, Pay Later a good idea?"

Piggybacking off of that, I figured we could start with maybe what buy now pay later even is, and I guess we could refer to it as BNPL.

Katie:

"Benple."

Henah:

"Benple."

And so it's a short-term financing option that you can use to pay for purchases over time. You've probably seen this when you're on checkout section shopping online and it's on popular apps like Affirm, Sezzle is a big one, Afterpay, Klarna, PayPal... I looked this up earlier and there's 10 of them. I would say those are the top five.

Katie:

I feel like Affirm and Klarna are the ones that I see the most often, and you can get BNPL, you can get Benple on everything now. It'll be a $10 product, and it's just five easy payments of $2.50. I'm like, "What are we doing you guys?"

Henah:

I have seen that. I've seen also a gift card that you could buy in $12 installments and I'm like, "Okay."

Katie:

Oh no.

Henah:

Every app that I just named has its own set of rules really. Some of them include... Most of them include 0% financing over a set period of time, but I feel like the catch that people don't really talk about very often is that they sometimes include fees and overdraft and late fees and, like I said, each one has its own rules, so I feel like it's less of a, "Is it a good or bad thing" and more of a, "You have to figure out what your purchase is and the limitations of the program that is on the site for it."

Katie:

Have you ever used it.

Henah:

I've never used it on the site, but then I've done the whole, when you use your Amex and then it lets you do a plan it installment thing through your credit card. So, I did it that way for...

Katie:

For what?

Henah:

... For our couch.

Katie:

A couch.

Henah:

The couch that I'm currently sitting on, and that just made me feel better because it was through Amex the provider versus a third party platform through a website.

Katie:

I see.

Was it 0% interest?

Henah:

It was.

Katie:

Okay. So you're like, "Okay, well if I can get the money for free and just continue..." I can see... That was my thought process for the bike too, and I probably would've done that.

I think it's interesting too to highlight... And this is one of those things where you're like, "Is it correlation or causation?" But I did find a statistic that those who had used buy now pay later were more than twice as likely to say that they could not pay all of their bills on time as those who had never used it. And they were almost three times as likely to have over drafted their bank account as people who had not used buy now pay later before.

So again, correlation, causation thing happening there. I think that there's-

Henah:

Well, I think it's that slippery slope that you talked about. It becomes a situation where it's ripe for overspending. Because if you use it...

Katie:

A hundred percent.

Henah:

... More than once or twice, then you don't even know how closely you're tracking all of your different purchases on buy now, pay later.

Katie:

Right. It's like the over drafting thing where if you've got six things that you're doing installments for simultaneously and suddenly you're making all those payments at once, that I can see where you get into hot water quickly.

Henah:

I think it'd be helpful for us to maybe go through the pros and cons of maybe what buy now, pay later offers, but before we do that, I have another quiz question for you.

Katie:

Oh gosh, okay.

Henah:

According to data by the Federal Reserve, consumers with a household income of less than what are four times more likely to use BNPL services than those with a household income above that threshold?

Katie:

I'm trying to guess the income threshold below which someone is a lot more likely to use it?

Henah:

Yes. Four times as likely.

Katie:

Four times as likely.

I don't know, man, stuff's expensive. I say a hundred K.

Henah:

75,000.

Katie:

Okay, so people that earn 75K or below are four times as likely to use BNPL...

Henah:

Yes.

Katie:

... As those that are above that threshold. Okay. Okay.

Henah:

Yeah, and I thought this was interesting because I was reading something from the Consumer Financial Protection Bureau. This is very sexy-

Katie:

As one does.

Henah:

And-

Yes, very casual Friday night reading.

And it said a common misconception of benple borrowers is that they lack access to other forms of credit. It's actually that they're more likely to use other credit products, and since benple is other forms of credit, they're working to ensure that borrowers have similar protections and that companies play by similar rules, which I thought was really interesting because I think there is this idea that if you make median or a lower income, you would not have access to other things. So you feel like this is what you need to use...

Katie:

Oh, I see.

Henah:

... But actually it's that people tend to leverage...

Katie:

All of it?

Henah:

... More credit.

Katie:

Well, and I did read something interesting. Because I didn't have personal experience with this, I was like, "Let me go figure out what the true cons are." Because there's always weird things at the margins, so for example, Sezzle, they give you the option to opt-in for credit reporting if you want it. So, if you make all your payments on time, it would help you, but if you're late in paying, it's then going to damage your credit score.

And options like Afterpay on the other hand, I know that that's another very popular one, they don't report anything, so it's not going to affect it in a good way or a bad way.

It's also worth noting that if you miss payments, those can trigger late fees and if you start missing a lot of payments or you're straight up not paying it back, that can be sent to collections. So, even if they wouldn't ordinarily report your activity with a buy now, pay later, the debt collector that's receiving it in collections might report that.

Henah:

Maybe then if you're trying to build up your credit and track your spending better and leverage potentially a signup or bonus or rewards program, a 0% interest credit card might be a better fit than something like buy now, pay later.

Katie:

I think I am generally in the camp of, if you are buying something discretionary and you're using it strategically because you already have the cash and you could buy it in cash, but it's a 0% interest rate and you have an investing DCA that you're doing and you don't want to disrupt that, and so you're just going to pay it off in six months instead of immediately, that to me is a very different calculus than buying discretionary items that you otherwise could not afford, but you can afford it if you're paying an installment.

I think this is one where, for me, if you look at the fees and interest that you would incur with late payments, or missed payments, or if there isn't 0% and now you're paying interest that you would not have been paying otherwise, the risk of financial overextension, so the ease that these programs give you where it makes you feel like you can afford more than you can and how that can be that slippery slope of getting in over your head.

And then the general risk of overdraft, I think that you might be opening yourself up to, because now you're going to have multiple payment plans that you're trying to manage every month. In my mind, the drawbacks really outweigh the benefits here, but I think if you were going to do it's one of those things where I think you'd have to put a hard limit on yourself of, "I'm only ever going to have one at a time," and there is a strategy in place. It's not that, "Oh, I can't afford to buy the couch, so because I can't afford it, I'm going to spread out the payments." I think in that case I'd be like, "I don't know if that's what I would be."

Henah:

Would you recommend that if someone is like, "Okay, I think I'm going to buy a $3,000 item over six months. I'm going to put $500 a month towards it." Do you recommend then that they build that into their wealth planner or budget or whatever.

Katie:

The debt payoff?

Henah:

Yeah.

Katie:

Well, it should definitely be part of your budget, because you're going to be having to spend it every month. You're basically... Future you is paying for something that present you is buying, which is generally not a great financial practice. Typically, you want it to be the opposite where past you is paying for things. But I think yes, I would say what should be built into a wealth planner budget if you're going to do it.

And I think generally, I would also want to know, is there any reason why you wouldn't just save the $500 per month for six months and then deploy it all at once versus purchasing it now and then paying it off 500 at a time? In the grand scheme of things, you're paying $500 a month either way, so if you can afford the 500 a month, would it not be better to just... I would offer that question as maybe do that instead and is there a reason why you're not doing that instead?

Henah:

Yeah, that's a fair question. I know with the couch, the reason we did it was because there was a sale for President's Day or Labor Day or something, where it was the cheapest it had ever been and I knew it was not going to go lower than that point because I'd been watching it for a while. And then I went on and I was like, "Okay, I'm going to do buy now, pay later, so I get another way to break up these payments." And then I was like, "Eh, you don't get anything. You don't get the discount if you also use buy now, pay later."

Katie:

Oh.

Henah:

So that's what incentivized me to go on the Amex and say, "Okay, well at least I can leverage the discount and then I can also do the payments that way."

But yeah, I think there is also the fact that you're missing out on rewards. And also things like... Your credit card offers... Like I had one for the Aura ring and I was going to buy it on a buy now, pay later just because I didn't feel like shelling out four or $500 at a time and then I was like, "It doesn't count if you use it for buy now, pay later." So I couldn't leverage the $50 off or whatever.

Katie:

I see.

There was something interesting too that... I know that most of them don't report or interact with the bureaus. They don't build your credit, but I did have someone reach out to me once that was like, "Hey, I was going to do this or I did do this," but I think they then went and applied for a mortgage or they had some big credit lending event and the...

Henah:

That's the biggest payment plan of all.

Katie:

Right.

And something about the BNPL stuff that they had done had messed with their credit utilization or their credit score, and they were like, "I didn't know that this was going to impact that." So I was unable to verify that story, again, this was something someone told me years ago, but it has always stuck with me. Anytime you start getting into consumer lending for discretionary stuff, it's something to be aware of. I probably wouldn't even take the risk or take the chance if you're about to be applying for a loan for a car or a home or that interest rate, and what you get approved for is so consequential at that point, you're robbing Peter to pay Paul.

Henah:

Oh, good analogy.

Katie:

Thank you.

Henah:

I never find that I'm in a situation where I can use that analogy, so good one.

Yeah, I think that makes a lot of sense.

I guess to sum up, the pros are that obviously if you have the cash, it's a good way to spread that out. Ideally that's a situation that you're in, but if not that you're able to know that you have the budget to do it over time. You get that 0% financing, hopefully with one of those apps that we named, and it's a soft credit check or no credit check, which is easier if you are struggling with credit or you have poor credit history. But potentially the cons might outweigh all of that.

Does that feel...

Katie:

Yes.

Henah:

... Like a reasonable recap?

Katie:

I think so. I think my addition would just be that, are there times where it could be strategically reasonable? Sure. Is it generally something that we at Money with Katie would advise? Probably not. I think... Yeah, the cons outweigh the pros in most cases.

Henah:

Yeah. Makes sense.

Katie:

Well, that is all for this week's Rich Girl Roundup, and we will see you on Wednesday to talk all about 2024, planning ahead, getting your life and finances rocking and rolling, and how the Wealth Planner can help set you up for success.

Henah:

Bye.