Unless you’ve lived under a rock, you’ve probably come across the option to buy now, pay later (BNPL) using Affirm, Afterpay, or Klarna for example. These companies seem like they are popping up everywhere. They offer zero percent interest (depending on credit profile) and the ability to spread payments overtime for everyday purchases.
This sounds too good to be true right?
That was my first thought as well, knowing that 47% of Americans are carrying credit card debt, according to a survey from CreditCards.com. Additionally how is BNPL different from using a credit card?
The reality is it’s a lot different in theory. It is technically a micro-loan.
In fact some of these companies don’t even run a hard inquiry on your credit profile prior to approval for the micro-loan. That could be a problem if used incorrectly and there has a been a statistic suggesting up to 1/3 of BNPL customers have missed at least 1 payment. So BNPL is not without risk and shouldn’t be viewed as “free-money.”
Recently I decided to purchase a Peloton. It is something that I considered for a while, however had trouble pulling the trigger on the purchase. While looking at the website I noticed I had an option to pay over time using BNPL via Affirm, so I decided to take the leap.
The approval process for an Affirm BNPL micro-loan took less than 15 seconds and was EXTREMELY easy from a user standpoint. This was completely different than the traditional credit card approval process. This was simple, decisive, and transparent. To be honest it was a refreshing process to go through and the ease makes it possible for anyone to feel comfortable applying for the micro-loan.
BNPL is what credit cards should be but cannot become.
BNPL will provide access to credit to those who typically have not had access while adding a potential interest free structure to their payments.
Responsible credit use is a component of financial literacy we don’t discuss enough. There is close to 353 million people in the United States and of that, roughly 200 million people have at least 1 credit card. Like it or not credit is a HUGE part of financial literacy and we need to do a better job at educating responsible use of it.
BNPL in its current form is not consistent in its ability to help improve a credit score. However it can harm it if not used correctly. Thus there is a risk-reward tradeoff that has to be considered with any use of these companies.
I do not believe BNPL is either good or bad at this time. I can see use cases across all income levels and I think it is a better option than credit cards.
As far as my Peloton purchase via Affirm, well I was able to get the 0% interest rate and a payment that is low as possible for 39 months. This machine replaces any gym membership I would have paid for and it gives me skin in the game to understand how Affirm works. I completed my first ride this morning and so far I am happy, but who knows what the future holds?
As always if you have questions or concerns regarding creating an emergency fund, investing, real estate, insurance, or planning for the future, don’t be afraid to speak with qualified financial advisor. Smart Asset has a great tool to find an advisor in your area or feel free to email me (contact@surgifi.com) to help you on your path to financial independence.
Follow us on Social Media