TUPELO • An evolution of the layaway program in retailing has been gaining popularity, especially as consumers turn more to online shopping.
It’s called buy now, pay later, or BNPL, and the concept is simple: make a purchase and pay for installments – typically over several weeks months – with no fees and no interest.
Unlike the classic layaway program, consumers don’t have to pay in full before getting the merchandise. They can get it right away (or shipped to them within days).
Brick-and-mortar retailers like American Eagle, Walmart and Target and online giant Amazon utilize BNPL. Buying channels like QVC and HSN have their own programs called Easy Pay and FlexPay, respectively.
Sherri McClain of Tupelo says she takes advantage of BNBP programs “all the time.”
“Not just at Christmas; Belk does it, Amazon does it and PayPay does it,” she said. “And I’ve not paid interest on any purchase in over 14 years. If you know how to budget, it’s not a debt trap. Most of them get paid before the term expires anyway.”
Some 20% of money spent this holiday season will be spent online, and retailers are ramping up their buy now, pay later programs. And more consumers are latching on.
In a study of 1,862 Americans conducted by The Ascent, a Motley Fool service, over a third (38%) of U.S. consumers have used a BNPL service, typically though an app like Affirm, Klarna and QuadPay.
BNPL is often viewed as an alternative to credit cards since there are no fees or interest charged if the installments are paid in time. If they aren’t, the interest rates can be 30% or more, and penalty fees are applied.
According to The Ascent poll, less than half of consumers (43%) understand all of the terms and conditions of buy now, pay later programs. In addition, more than 1 in 5 users (22%) have missed a payment and the same amount expect to miss another payment in the next 12 months.
“While BNPL services don’t charge interest if you make all of the payments on time, it’s important to know what happens if a payment gets missed,” says Matt Frankel, CFP and personal finance expert at The Ascent. “Some services start charging interest on unpaid balances as soon as one of your payments is late, and it’s usually more than the average credit card charges. In addition, almost all BNPL services charge late fees. And though BNPL services usually don’t report your payment activity to the credit bureaus, they will if you’re late. So, while a credit card can potentially help or hurt your credit, a BNPL service can only hurt it.”
That won’t be a problem for many consumers who say they won’t take advantage of BNPL programs. If they don’t have the money for it at the time of purchase, they won’t leave the store – or the website – with it.
Said Elliot Parker of Oxford, “If I can’t afford it I don’t buy it.”
Missie Cochran of Tupelo echoed similar thoughts.
“I didn’t know it existed,” she said. “I wouldn’t do it though. If I can’t afford it, I can’t afford it.”
But for some, spreading out high-ticket items in equal payments is more financially manageable. And with Christmas around the corner, BNPL also is an option because consumers can buy a high-demand item right away and stash it away either in the attic or under the tree.
It’s all about managing your finances, said Tameka Traylor.
“It’s no interest on the payments,” she said. “It’s broken down in four payments for the actual price so you’re not paying more. To me its not a debt trap. You made your four payments and you’re done.”
Consumer finance experts warn, however, that not everyone is responsible. And putting off payments can lull consumers into making impulse buys that fulfill wants more than needs.
Flexibility in purchasing
Alexis Hatchett of Tupelo uses Sezzle, Klarna and AfterPay among others for her purchases.
“I’ve been using Sezzle with a boutique out of Texas for about a year,” she said. “I like the way it is interest-free and also how the payments are spaced out over time. In my opinion, it gives more flexibility in making purchases and not having to feel guilty, if that makes sense.”
Sezzle said it has more than 20,000 retailers it partners with. Consumers who use the app can pay off a bill in four equal payments over six weeks.
Founded in 2016, Sezzle had more than 1.1 million users in the first quarter of this year.
And who uses BNPL programs? Those aged 35 to 44 are most likely to have used a BNPL service, while those over the age of 54 are least likely to have used one.
BNPL apps continue to see attract more users. According to NBC News, consumer downloads of Klarna are up over 106% from last year. In the first month of the pandemic, Affirm saw a 163% increase in home fitness sales, and home office sales grew 200%. Over Black Friday weekend, Afterpay said it saw a 186% increase in sales, while Klarna said it processed five times more transactions over the weekend than in all the first four years of operation combined.
Adam Ezra, co-founder and co-CEO of BNPL service QuadPay, told The Ascent, “In the past three years, QuadPay has grown significantly, serving over 2 million consumers and thousands of retail partners on its platform.”
Geoff Kott, Chief Capital Officer at Affirm, said since its founding in 2012, Affirm has serviced more than 5.6 million consumers.
For consumers who still like credit cards and like some of the features of BNPL, Frankel of The Ascent said there are alternatives such as 0% introductory APR credit card offers on the market, many with zero-interest periods of a year or more and with no annual fee.
“Some even offer the ability to earn cashback rewards on your purchases. This can be a great alternative to using a BNPL service that requires full repayment in just a few months, especially if you want your on-time payments reported to the credit bureaus and want the flexibility to pay over a longer period of time.”
The bottom line is if consumers plan to use buy now play later series, they need to make sure they’re in the financial position to make the payments in time to avoid interest and fees.
Nathan Hamilton, director of The Ascent, said BNPL series can “provide a false sense of security.”
“Because credit checks aren’t usually required, the people using BNPL may not be in a financial state to repay their debt,” he said. “That leads to defaults and can negatively impact consumer credit scores. While buying now and paying later isn’t always a bad idea, it’s very important to be careful when determining how much you can afford to pay, especially since your repayment window will only span a few months.”