Thu, Nov 9, 2023 5:00 AM
By Michael Pollick | Wealth of Geeks, Wealth of Geeks
According to a recent survey by Morning Consult, 20% of American adults report using a ‘Buy Now Pay Later’ (BNPL) service to make household purchases in 2023. This alternative to traditional debit, credit, or cash point-of-sale transactions has been growing in popularity.
The Morning Consult survey also reveals that BNPL services are especially popular with Gen Z consumers, with 37% of participants reporting frequent use of this trending option.
But what exactly is BNPL, and is it truly an improvement over familiar payment options that require full funding at the time of purchase?
BNPL services from companies such as Affirm, Sezzle, Afterpay, and Amazon Pay are essentially immediate short-term loans approved at the time of purchase, with repayment terms between the lender and the borrower. The vendor receives full payment at the time of purchase, while the borrower makes regular payments to the BNPL company.
How Does A Buy Now, Pay Later Payment Service Work?
The BNPL system begins with a client establishing an account with a service provider. An encrypted card, much like a credit or debit card, is used to make purchases at participating venues. The vendor receives immediate payment for the purchase, but the BNPL service provides the funds. The client makes regularly scheduled payments towards the balance of the transaction.
Some BNPL companies charge a nominal amount of interest on the loan, and late fees are commonly assessed. Participating merchants pay a transaction fee, but unlike the presentation of a bad personal check, the seller is rarely involved in the debt collection process.
Are There Advantages To Using A BNPL Service?
One of the major financial advantages of a BNPL service is the availability of funds. Credit card purchases incur substantial interest rates, and a number of younger adults don’t qualify for those services. Cash and debit card purchases require a fully funded source at the point of sale, which makes it difficult to buy high-ticket items, such as electronics, or pay for emergency services.
A BNPL service adjusts the size of the “loan” to the amount of the purchase, so the borrower is only obligated to repay the exact balance. The repayment terms can often be negotiated to reduce any potential lag time between pay dates or other sources of income.
Another advantage of using a BNPL service is financial protection. Unlike a missed credit card payment or loan default, negative information from a BNPL transaction is rarely reported to national credit monitoring agencies. Missed BNPL payments can still result in late fees or a complete termination of the service, but they won’t affect the borrower’s credit rating for other programs.
What Does The Average BNPL Customer Look Like?
According to the Morning Consult survey data, many participants in BNPL programs are younger, with 37% of Gen Z and 32% of millennial respondents reporting BNPL transactions in August 2023. The numbers fell to 16% among Gen X, and only 6% among baby boomers.
A typical BNPL client also has a medium to high annual income, with a total of 49% of households earning $50,000 reporting recent BNPL transactions. These participants are largely tech-savvy, which accounts for their interest in one-off purchases of expensive electronics and other high-tech products.
One surprising fact – the average BNPL participant turns to these forms of alternative financing because traditional banking institutions don’t always offer everyone adequate services. Limited access to credit cards, debit cards, or online banking services makes the BNPL option more appealing to consumers who would otherwise incur significant debt or not qualify for personal loans or other services.
Are There Downsides To Using A BNPL Service?
As with traditional credit or loan programs, there are several negatives to consider before opening a BNPL account. By design, a BNPL transaction is a debt that must be repaid in full. While the contract between the merchant and the buyer may be settled at the time of purchase, the legal relationship between the lender and the borrower still exists. The terms of repayment are binding and not always negotiable if financial circumstances change.
The relative ease of a BNPL transaction can also encourage participants to take on more personal debt than they can actually afford. A bi-weekly repayment of $50 on a $200 BNPL purchase might not be unmanageable, but adding a $700 furniture purchase and a $1200 electronic purchase could make the combined payments a challenge.
John Dealbreuin, a personal finance expert who writes at Financial Freedom Countdown, is not a fan of BNPL He says, “While they provide an alternative to traditional credit cards and can help with budgeting, they also come with their own set of terms and potential financial pitfalls. It’s essential for consumers to read the fine print, understand the fees, and make sure they can meet the installment payments. Late fees and interest charges can quickly add up, turning a seemingly affordable purchase into a costly one.”
BNPL companies are also largely unregulated compared to more mainstream financial institutions. There is no FDIC insurance protection, for example. Disputes over payments, loan balances, or fees are generally handled as private legal matters, and litigation is often expensive. It is important for BNPL clients to understand their legal and financial obligations before entering into a contract with a service provider.