Money Rehab with Nicole Lapin - Buy Now, Pay Later Programs: the Good, the Bad and the Ugly

Episode Date: August 29, 2022

We’ve all been there. You see a hoodie online and you want it— but it's $70 and that’s a little more than you're comfortable spending. Then you spot it. Just below the price: Pay four interest-free payments of $17.50. And you think “I have $17.50. That’s nothing.” We’ve all been there. And if you’ve clicked— don’t despair because Nicole is here to give you the good, the bad, and the ugly on all those companies offering buy now, pay later, zero interest plans.

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Well, it doesn't. Charge for wasting our time. I will take a check. Like an old school check. You recognize her from anchoring on CNN, CNBC, and Bloomberg. The only financial expert you don't need a dictionary to understand. Nicole Lappin. We've all been there.

You are looking at something online, let's say it's a hoodie. And let's say it is the perfect hoodie. That deep hood, slightly cropped, and the fabric looks like butter. You can imagine yourself in it getting on a plane and jetting off to some cool adventure or just going out for a crisp fall walk with your friends and looking effortlessly cool. But it's $70 and that's more than your comfortable spending. Then you spot it. Just below the price, pay four interest-free payments of $17.50. And you think, I've got $17.50?

That's nothing. We've all been there. And if you've clicked, don't despair because I'm here to give you the good, the bad, and the ugly on all of those companies offering buy now, pay later, zero interest plans. Let's start with the good. Most of these companies are legit. You've heard of the biggies, Afterpay, Klarna, and Affirm. These companies also only do a soft credit check before giving out the loan. And as an aside, yes, that's what you're doing when you're opting into these buy now, pay later plans. You're essentially taking out a loan. These companies aren't fairy sweatshirt godmothers, they're lenders. But back to the soft credit check. This is the type of credit check that does not ding

your credit score. And if you do go ahead and buy that $70 hoodie in $17.50 installments and you make the payments every two weeks, you're in the clear. Now, if you have subprime credit and you absolutely need something and you know you can afford the payments, it might make sense for you to use buy now, pay later financing occasionally. But this should be considered extreme emergency use only credit. Think your winter coat got stolen and it's February in Chicago and you walk to work kind of emergency. But short of an emergency like that, do not use them because there's a lot of bad with these companies as well, and it can get ugly if you're not careful. But before we get to the risks, let's answer a fundamental question.

If these companies aren't charging interest, how the hell are they making money? The answer is pretty simple. They're charging the vendor. And are they ever charging? Buy Now, Pay Later companies charge vendors between 4% and 9% of the purchase price of the item. That is a heck of a lot of money. Just for reference, if you use a credit card to pay for an item outright, typically the credit card company charges the vendor between 2 and 4 percent. So if you had paid for the $70 sweatshirt outright with a credit card, the vendor probably would have been charged three bucks or so by your credit card company. But if you buy that $70 sweatshirt with a buy now pay later service, the vendor will end up being charged something like six bucks. That's double what the credit card companies charge. So you might be wondering, why would vendors even offer the Buy Now, Pay Later programs

on their platform if they're so pricey? Well, because these programs are super popular and they end up driving sales on the platform. But money from vendors isn't the only way these programs get money. And that teases up to talk about the bad. Okay, so let's say last fall you bought that hoodie and every two weeks you made your payment of $17.50. After six weeks, you managed to pay the entire thing off without harming your credit. Now, I have a little bit of bummer news for you. That didn't help your credit. Credit-wise, you're in the same place you were before you started the plan. Until recently, most buy-now-pay-later companies weren't reporting anything to the credit bureaus unless people defaulted on their loans. In other words, you don't get any credit score love by

showing that you can pay off a loan like you do when you pay off any other loan, a mortgage, a business loan, a car loan. Like I said, buy now, pay later programs are starting to change their reporting practices. But even so, I still say do not buy anything. No, not even that purse that you have been putting in and then taking out of your cart and then putting it back in for the last six months. I mean nothing with any buy now, pay later plans because there's more. These companies don't have the same legal responsibility to their borrowers that traditional credit card companies do. Buy now, pay later companies actually have no obligation to help you get your money back

or even stop payment if something goes wrong. All they do is loan you money, which means if you get screwed over while online shopping, like if that sweatshirt vendor disappears from the face of the internet and your hoodie never gets delivered, you're on your own. Sure, it's easy when you're credit phobic to view buy now pay later plans as a safer alternative to credit cards or loans because it's just a few bucks here, a few bucks there, there's no interest, and you feel like you know what you're doing. And that is where it can get really ugly. Because these plans hook you in with seemingly low prices, it's easy for people to find themselves committing to more and more of them without really thinking about what it means for their overall budget. $17.50 here, $25 bucks there, another

$20 bucks, and suddenly you're making over $60 in payments every two weeks. It's really easy for people to end up getting trapped in a debt cycle without even realizing it. And when they do, it's too late. Because these payments can add up, and because they go on for six weeks, people often end up missing payments. As many as 43% of Gen Zers have missed a payment in one of these plans. Millennials aren't doing much better at 31%. By the way, these numbers are from a survey from last year, so before inflation started really hitting people right in the wallet. I think it's quite possible for these stats to get even worse, as it's harder for people to even make these payments. If someone fails to make a payment,

the company might freeze their account, potentially slap them with a late fee, but typically after a couple of missed payments, they send people into collections. Most of these companies also only allow for payments that match the original terms or for complete payment of the debt. This means you can't just maintain the debt the way you can with credit cards. Buy now, pay later loans are appealing when you're struggling to get credit elsewhere. In fact, almost 50% of buy now, pay later users have subprime credit. And you know what the ugliest part of all of this is? Taking advantage of people with subprime credit. For today's tip, you can take straight to the bank. One more way to snag that hoodie. If you really need something and you can't afford it

and you can't get the credit, consider a layaway plan. These are something of a dinosaur, I'm not going to lie. And just like dinos, they're going extinct because they've been replaced by buy now, pay later programs. But they're still out there for now at a few places like Amazon on certain items. They don't help you with your credit because they aren't reported to the credit bureau. But unlike buy now, pay later plans, they also don't hurt your credit if you default you simply get your money back minus some fees and of course minus the item itself money rehab is a production of iheart radio i'm your host nicole lappen our producers are morgan lavoie and mike coscarelli executive

producers are nikki etor and will pearson Our mascots are Penny and Mimsy. Huge thanks to OG Money Rehab team, Michelle Lanz for her development work, Catherine Law for her production and writing magic, and Brandon Dickert for his editing, engineering, and sound design. And as always, thanks to you for finally investing in yourself

so that you can get it together and get it all.