BNPL – Risky Bet?
The Buy Now Pay Later (BNPL) model is a popular payment plan for small holiday purchases, such as furniture, appliances, electronics, and sporting goods. To earn this plan’s benefits, the seller must offer the product for sale on their website during a specified period. Sometimes during this time period, consumers are required to make a down-payment or otherwise deposit funds into an account held by the seller. When the purchase date arrives, the consumer pays only a partial amount and is then responsible for the balance upon delivery of the product. While this type of payment plan often sounds as if it would offer greater protection to consumers, what risks do lenders face when they offer this type of financing?
Risk associated with BNPL
Potential risks from the business perspective include:
Declining sales
When the seller has set a specific start date for their “sale,” customers are probably less likely than usual to purchase on that day. Because customers are influenced by the start date, this may also discourage them from purchasing in the future.
Creditors not receiving payment
BNPL agreements place consumers in a position of financial responsibility for products they have purchased before they have received them. For some consumers, this is a result they could have expected and planned for. However, others may be surprised to find that the only source of funds available to repay their loan is the sale of their product, resulting in payment delays or non-payment altogether.
Consumer awareness
BNPL agreements are typically communicated through the seller’s website and on their sales flyer. While many consumers read such materials, others may not realize that they are creating an obligation to purchase an item of value. Therefore, consumers who do not comply with the agreement must be given additional information by the lender, which can also lower the success rate of BNPL financing.
Some companies that offer to buy now pay later services include BuyEasy.com, BuyLater.com , ZippyPay.com.
Why it is risky to buy using BNPL?
The decision to buy now and pay later is indeed a risky business. With sites like Rent-to-Own, which will allow you to purchase items with the option to pay in installments with no credit check, you can get things you can’t afford just yet with little or no hassle. But is this really wise?
There are many risks involved in these types of transactions. One of the most obvious is the interest rate; it will be much higher than if you could get a credit card or bank loan.
This is especially true if you have low credit and lack the ability to qualify for a traditional loan. This can prove very costly, especially if the item is something you really need or if it’s a very expensive item.
But there are other issues as well, and they are often not so obvious. For example, let’s say you’re trying to buy a car. You’d like to purchase one that has only four thousand miles on it, but you budget only three grand for the car. You’d happily pay three grand for the car (with a $200 warranty) but the dealer won’t let you drive out of the lot until you’ve paid five grand.
How much of a deal is this? You’re going to be paying way more in interest than if you had done something else that was much simpler and less risky.
The problem with these kinds of deals is that they often have hidden fees and conditions that will probably come back to bite the buyer.
If this is how you have to buy things, then you need to make sure that you are aware of your rights and how these types of deals work. You’ve heard the classic expression “Buyer Beware”; well it’s certainly true for buying now and paying later.
Paying over time reduces the risk of buyer’s remorse. If you are thinking about buying something, you may fall in love with it, but then change your mind when you actually have it at home.
This may only work if you’re not buying items that have a high resale value, so it doesn’t work for buying stuff like furniture or electronics.
If you’re paying for things over time and then end up going into debt, then it may be a good idea to cancel the payments and refocus on paying down the balance.
Summary
Many people who use buy now, pay later don’t actually have a big problem with debt and are using it as a way to save money. They certainly may not be putting their finances at risk, but that doesn’t stop them from being wrong about the concept.