Are We Headed for a BNPL Crash?
The shiny new thing in consumer credit is gaining popularity — and raising concerns about how we rely on debt for pretty much anything
One of the first segments I worked on as a media consultant was on the growing trend of “buy now, pay later”. This was less than a year ago and the finance expert and I saw it for what it was: a marketing trick to get consumers buying things again.
And it seems the scheme proved too good for some consumers. Especially young people at the beginning of their careers.
Remember your 20s? When you earned entry-level salaries and for the first time could spend your meagre earnings on whatever you wanted? Me too. And I have the credit card debt that followed me well into my 40s to prove it.
Well, now Gen Z is taking to BNPL like I took to my Visa and people are afraid for them.
If you’re not familiar, BNPL is a form of financing where the consumer can choose to pay for a product over a series of instalments. Say you want to buy a $1,000 laptop. You can buy in full, or you can choose to pay in $250 every three months. Usually it’s interest-free and you only get dinged with fees if you miss a payment. The BNPL platforms get a fee from the retailer.
Like all marketing tricks, it fools you into thinking the product is somehow more affordable. $1000 might hurt in one payment, but $250? And I only need to pay it every three months? I can handle that.
The fear-driven headlines are pointing to the drunken-sailer spending BNPL apparently encourages. But in our debt-driven society where student loans are not only encouraged, they’re a right of passage, is BNPL really the enemy?
Can You Really Afford It?
Here’s the thing. The $1000 product isn’t any more or less affordable spread out over time. You’re still forking over that full amount.
And when you spread out the payments, you’re putting a strain on your monthly budget over a long period of time.
This leaves you vulnerable when other areas in life get more expensive. Like groceries, gas and housing. Sound familiar?
If you’re maxed out on BNPL instalments for life’s luxuries, you don’t have any wiggle room for life’s necessities.
I’m not immune to the lure of paying by instalments. Last year when I started my business, I was creating a lot of social media content to build my brand. I knew I needed to upgrade my phone, but I wasn’t bringing in any money from the business. And freelancing was just starting to warm up.
I was reluctant to drain my emergency savings for a phone upgrade, so when I saw the instalment option I was intrigued.
My first question: does the math add up? Specifically if I add up the individual payments, does it add up to the retail price? Or do I need to worry about hidden fees that will add up over the course of this payment plan?
My next question: can my monthly budget handle this regular payment?
I’m quite meticulous with my spending. I track it on an excel spreadsheet that I update every few days. I don’t set spending limits. But it is how I keep an eye on my full financial picture.
Most importantly, it’s how I answer the question: can I afford this?
Whether you use a credit card, line of credit, BNPL or other loan, you need to come up with a plan for how to pay it off. You need to know with certainty if there’s room in your monthly budget to make these payments.
The More You Pay, The Less You Save
Credit and financing can make you feel rich. They’re designed to give you the illusion that you have more spending power than you actually have.
It’s a trap I feel into when I got my first credit card. And I’ve felt it again anytime I’ve refinanced a mortgage.
Borrowed money isn’t wealth. It’s a deficit. It’s the target for how much more money you need to make just to break even.
The money you make is finite. You get a fixed amount each month to work with. When you spend more than this fixed amount, your zero balance (and true wealth) gets further out of reach.
The more obligations you have each month, the further you need to stretch this fixed amount. So prioritize your obligations. Here’s my list:
- Necessities: food, shelter, clothing
- Automatic savings. When I had a salaried job, I set up an automatic transfer to a savings account timed with every pay day. Now that I’m self-employed, I keep those automatic transfers going. And I’ve factored this into my minimum earnings for each month.
- Everything else. But with the goal of still having money left over at the end of the month. These “bonus savings” either get transferred to savings or to pay down my line of credit if it’s carrying a balance.
Prioritizing savings has helped me not only keep control of my finances, but it’s helped me grow wealth over time.
I have money set aside for emergencies.
I have money set aside for splurges.
I have money set aside to keep me from relying on a credit card or line of credit.
I still use credit. My bathroom reno is on a line of credit. My phone is on a payment plan. So are my adult braces, because I bought the cheapest private benefits plan and it covers very little.
Affordability in the 21st century has to be broken down into monthly payments. Otherwise it’s too overwhelming. I don’t think about the bulk of my mortgage. I think about the weekly payments and if my monthly earnings cover that.
The goal is to give yourself options. If borrowing is your only option, it might be time for tough choices. But if there’s a savings cushion and you’re able to build savings regularly, debt and payment plans might not be the end of society as we know it.
