Buy Now, Pay Later – Friend or Foe?

Buy Now, Pay Later (BNPL) companies such as Afterpay and ZIP have introduced us to a new way to spend money which has revolutionised retail spending as we know it.

For those of you who may not know, BNPL companies are basically bringing the old layby system into the modern age – allowing us to pay for things in installments. A key difference being of course is that you get to have what you want now rather than having to wait until it is fully paid.

The rise of these companies has been particularly prominent over the last few years with BNPL transactions increasing by 55% in 2019/20 and have more than tripled since 2016/17. This is according to a report from the Reserve Bank of Australia in March 2021 (1).

These BNPL companies typically target millennial shoppers with the majority of users being under the age of 40.

Unlike credit cards, there is typically no interest payable on these outstanding payments (there can be late fees however). This is perhaps why credit card use is declining while BNPL use is rising.

Credit cards can charge outrageous amounts of interest and if you get into the habit of using your credit card to fund your expenses, this interest can quickly add up and snowball. All of a sudden, all of those clothes and shoes you bought on sale and got a great deal on doesn’t look so good.

Therefore, it is understandable that BNPL may be seen as a better alternative than a credit card and I would have to agree with this. Particularly for young Australians who may be able to get a credit card with a limit that is far too much for them to handle. If BNPL helps to reduce the amount of credit card debt in Australia, then I believe that is a good thing.

In fact, some people see BNPL as a bit of a budgeting tool. Instead of having to pay $200 for new sneakers today, you can budget this across your next four pay cycles and only pay $50 over four fortnights.

Unfortunately however, by being able to spread out transactions across four separate payments, we can easily spend more than we would have liked. For instance, you may not be able to justify paying $300 for a new pair of jeans, however, paying $75 over four weeks does not feel quite as bad.

While the math may be simple and we can see than this is the same amount overall, when we are in the moment of purchasing, the brain only focuses on the $75 instalment, not the total purchase price of $300.

This human tendency that leads to this outcome is known as loss aversion bias whereby we prefer to avoid losses over acquiring the equivalent gain (e.g. we would rather not lose $10 than gain $10).

So while BNPL may be better than a credit card, this does not necessarily mean that are good for our spending and saving overall.

Therefore, some tips to make sure you do not overspend when using BNPL:

1. Always look at the total purchase price, not the instalment
2. Set spending limits and stick to them
3. Sleep on it – see if you still want to make the purchase the next day

If you do find yourself spending a little bit too much through BNPL, you may need to consider closing your account and saving up for things the old fashioned way. This may help you not buy things you cannot yet afford and greater appreciate the things you do buy.