Are Buy Now Pay Later Retail Loans Profitable?
While shopping online, you may have noticed buy now, pay later purchase options that break down the price of an item into interest-free installments. This is sometimes referred to as a “digital installment plan,” except that your item is immediately shipped to you – what don’t you like? Well, these loans can make shopping too easy, and late fees can be high for inexpensive items.
How it works?
As the pandemic spawned a surge in online shopping, the buy now, pay later (BNPL) trend has only grown in popularity, especially among millennials who have used debit spending as an alternative to credit cards (18% of millennials). have made at least one BNPL purchase in the last two years).
The setup is pretty straightforward: when you shop for an item like a Peloton bike or Anthropologie dress, you will be offered a POS loan from BNPL as a payment option (for example, you buy something for $ 1,000). , you may be able to pay this amount in $ 250 installments over four months). Companies like Afterpay , AFFIRM and Klarna will service their loan and they don’t require a tight credit check or charge interest on what is essentially a personal loan.
To make money, buy now, pay later services charge merchants and retailers a commission of 4–6% per transaction – double what a credit card company would normally charge. In return, retailers (including Urban Outfitters, Walmart, Anthropologie, and Warby Parker) generally generate additional revenue by increasing sales of high-value items that customers might not otherwise have purchased, especially shoppers with low-limit credit cards. or a low credit rating.
So what’s the problem?
Sarah Newcomb, director of behavioral science at Morningstar, best described it in an interview with The Atlantic :
“What can be a predator for one type of client is actually a very good solution for another type of client.”
What’s so attractive about these services (“no credit check required!”) Is what makes them a little risky. Loans are easier to get than credit cards, but keep in mind that credit cards are already debt traps for many people; Installment loans carry a similar risk (a recent survey by Cardify.ai shows that 62% of BNPL users have outstanding balances totaling over 75% of their total credit limit when signing up for installment payments). On the other hand, the same study shows that 50% of users have enough money to pay five times more for their purchase, so this is indeed a mixture of people using BNPL, with some spending more responsibly than others.
And then there’s the question of late fees, which can range from $ 7 to $ 10 for a missed installment. It might not sound like a lot, but it can be expensive compared to the cost of the items, especially when the purchases are small – say $ 100. These services usually won’t help you improve your credit score either, but they can certainly hurt it if you miss a payment. And while most of these services are known to provide interest-free loans, some actually charge interest depending on the payment plan — you’ll want to read the fine print before signing up.
Bottom line
BNPL services can be a good alternative to using a credit card, but they shouldn’t rule out any legitimate reason why you can’t use a credit card. If your credit card is depleted or impulsive purchases are a problem for you, the temptation may not be worth the worry – it might be easier to just save on the purchase. And refusing payments in the future can take you by surprise: a recent study by Cornerstone Advisors found that 43% of consumers who buy now, pay later missed a payment, with two-thirds of respondents blaming this for not knowing when the bill should have been. paid, and not due to lack of cash.