Should you buy now and pay later?

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When the Federal Reserve Bank of New York released its household debt report, the numbers were mind-boggling. Total household debt in the first quarter of the year rose 1.7% to $15.84 trillion, bringing balances to “$1.7 trillion more than at the end of 2019, before the COVID-19 pandemic”.

Jill Schlesinger

Details showed big jumps in mortgage and auto lending fueled the rise as many rushed to lock in still-low interest rates before they started to rise.

Interestingly, credit card balances were down $15 billion in the first quarter, but are still $71 billion higher than a year ago. Economists posit the reason for the decline is that many have dipped into their pandemic-era savings (the savings rate peaked at 33.8% in April 2020) and inflation is eating away at what’s left. . The government said the personal savings rate was 6.2% in March, down from 8.3% in February 2020, before the pandemic hit.

Meanwhile, with inflation near 40-year highs and more Americans struggling to pay their bills, another category of debt has snuck its way into the conversation: Buy Now Pay Later (“ BNPL”).

You’ve probably encountered messages from your favorite online or even physical retailer asking if you want to finance your purchase with BNPL, an installment plan, where you can typically pay 25% of the purchase price now and then defer the rest. of the cost in smaller equal chunks in the future (usually a total of four payments), without requiring rigorous credit checks, which can hurt your credit score.

If everything goes well and you make your payments on time, there’s usually no interest charged, which is good business, especially in a rising interest rate environment.

That said, if you miss a payment, there may be late fees and interest, depending on the retailer and the purchase amount, and some apps may have a small upfront charge each time you use a plan. That’s why the Consumer Financial Protection Bureau warns that “BNPL could look like a standard form of payment,” meaning users are “really going into debt in a new form.” In other words, like a credit card, BNPL is a convenient way to make a purchase, if you have a plan to pay back the amount that has been charged.

The advantage of using a credit card is that you may be eligible for cash back or rewards, there is ample fraud protection, merchant dispute support, and the mature card industry has mastered reporting on-time payments to credit bureaus, which can help improve your credit score. The downside of credit cards is well known – if you can’t repay the purchase in full, you’ll be hit with exorbitant interest charges.

Still, BNPL users seem to appreciate the convenience, transparency, flexibility, and predictability of the plans, which is why the industry is exploding. According to CB Insights, “By 2025, the global BNPL industry is expected to grow 10 to 15 times its current volume to reach $1 trillion in gross merchandise volume, which is why many participants in the he $8 trillion US payment card industry is also growing. its own versions of BNPL or in partnership with companies that are already in space.

The big BNPL players are Affirm, Afterpay, Klarna, PayPal and Zip (formerly Quadpay). Each has different rules regarding fees and interest rates, so you need to read the fine print carefully to determine if you’re ready to jump on the BNPL bandwagon. Like most borrowing decisions, a lot of it depends on exactly where you think you are in your financial life when the train pulls into the station.

Jill Schlesinger, CFP, is a CBS News business analyst. A former options trader and CIO of an investment advisory firm, she welcomes comments and questions at [email protected] Check out his website at www.jillonmoney.com.


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