NerdWallet's Smart Money Podcast - Buy Now, Regret Later? Decoding BNPL and Layaway Payment Plans

Episode Date: December 11, 2024

Learn the pros and cons of layaway and Buy Now, Pay Later (BNPL) and how to choose the best option for holiday shopping. What is the difference between layaway and Buy Now, Pay Later (BNPL)? Which payment option is better for holiday shopping? Hosts Sean Pyles and Anna Helhoski discuss these two financing tools, how they work, and which might be the smarter choice for holiday shopping. Lauren Schwahn, a writer at NerdWallet who covers credit, debt, budgeting and money, joins Sean and Anna to break down the basics of layaway and BNPL, highlighting differences in payment timing, access to purchased items, and impact on credit. They also discuss when you’ll receive your item, the repayment timelines, potential fees for missed payments. why BNPL appeals to Gen Z, and how either option can fit into a shopper’s financial strategy. Plus: tips for avoiding pitfalls with BNPL, such as setting payment reminders and avoiding multiple loans. Then, Sean and Anna break down this week’s money headlines, including the latest jobs report, the CFPB’s crackdown on illegal junk fees, and the rise of market timing among investors. There are a lot of ways to invest money — high-yield savings accounts, CDs, bonds, funds and stocks are all options. To learn more, read NerdWallet's writeup on the best ways to invest money right now: https://www.nerdwallet.com/article/investing/the-best-investments-right-now  In their conversation, the Nerds discuss: buy now pay later, BNPL pros and cons, layaway vs BNPL, holiday shopping tips, budget-friendly shopping, buy now pay later risks, layaway payment plans, how BNPL works, shopping on a budget, avoiding holiday debt, payment plan comparison, layaway benefits, BNPL for Gen Z, holiday financing tips, budgeting for big purchases, holiday shopping savings, credit impact of BNPL, layaway financing, BNPL fees, installment payment plans, choosing BNPL or layaway, holiday gift financing, Klarna, Afterpay guide, Affirm payment plans, layaway history, BNPL for beginners, managing BNPL loans, credit card vs BNPL, smart financing options, how to use layaway, BNPL payment reminders, financing options for gifts, and understanding BNPL terms. To send the Nerds your money questions, call or text the Nerd hotline at 901-730-6373 or email [e-mail]. Like what you hear? Please leave us a review and tell a friend.

Welcome to NerdWallet's Smart Money Podcast. I'm Sean Piles. And I'm Anna Hilhoski. And this is our weekly money news roundup, where we break down the latest in the world of finance to help you be smarter with your money. We'll go deep into a single topic, then leave you with the latest money headlines. The holiday shopping season is well underway, but we have a feeling there are a few stragglers out there. Guilty. Me too. So today we're talking about the tools shoppers afford to make big purchases and the potential risks involved. We'll be diving into

two ways that shoppers break up the cost of one big purchase into multiple smaller payments. The old school way is called layaway, and it's been around since the Great Depression. The new school way is called buy now, pay later, or BNPL, and it's a rapidly rising online payment method that's gaining popularity among Gen Z. Adobe Analytics expects shoppers during this holiday season to spend roughly 11% more using BNPL than they did a year ago. Here to walk us through both payment options is Lauren Schwan, a writer at NerdWallet who covers credit, debt, budgeting, and money.

Lauren, thanks for being here today. No problem. Let's hit the basics first. What is layaway and what is BNPL? Layaway typically is where you make a down payment on a purchase and pay the remaining amount over time. The retailer holds that item until you finish paying for it. Buy Now, Pay Later is a loan that splits the cost of the purchase into a series of equal payments, and you make the first one at checkout. With Buy Now, Pay Later, you get the item immediately after that first payment. You

don't have to wait until the full balance is paid. How long does it take to pay off a layaway purchase versus a buy now, pay later one? And when do you actually get the item that you're financing? That depends on the terms of the specific plan that you sign up for. Layaway purchases, those usually take a few weeks to a few months to pay off, and you get the item whenever you make that last payment. Buy now, pay later purchases can take a few weeks, months, or even years to pay off. Usually the most popular plans follow what's called a pay and for model. And that's where the total cost is divided into four installments due every two weeks. And they're typically paid off in about six weeks time. With buy now, pay later, though,

you still get the item that you're purchasing right after checking out, regardless of how long the repayment period lasts. What are some of the benefits of using layaway versus buy now, pay later, and vice versa? One benefit of layaway is that it's not a loan, so you aren't required to take on debt to make the purchase. You don't need a credit check to get on a layaway plan, and there's no direct effect on your credit. If you can't complete the layaway payments, it's just that you won't get the item and you may have to pay a fee, but it's not going to go to a debt collector or anything. The big benefit of buy now, pay later is that you don't have to wait to get the item. It's yours right away. You don't have to pay the full price first. Depending on the plan, you may not have to pay any fees or interest charges. Another advantage is that buy now,

pay later plans are more widely available than layaway plans. And those advantages that you just listed a buy now pay later can also be what make them risky, but we'll get into that in a little bit. How does either option differ from just using a credit card to make a purchase? Credit cards also help you spread out the cost of a purchase, but most will charge interest on your unpaid balances. With layaway and buy now pay later, you'll either pay no or low interest in most cases. But unlike credit cards, on-time layaway and buy now pay later payments aren't reported to the credit bureau, so they won't help you build credit. But by using layaway or buy now pay later, shoppers may also miss out on

the cash back and rewards that most credit cards offer. So now that I think about it, layaway isn't something I see offered very often. Now, I'm going to age myself, but when I was a kid, I remember holiday commercials from department stores that specifically advertised layaway as an option. In this day and age, how do you find layaway? You're right. Layaway was a lot more common decades ago, and there have been some periods of resurgence more recently. Amazon had a layaway option actually just earlier this year, but most of these plans have been phased out in favor of buy now, pay later. These days are more likely to find layaway at businesses like local furniture stores, jewelers, and pawn shops instead of the big name retailers and department stores. Some larger companies still

do offer it or they might sometimes bring it back just for a short period of time, especially around the holidays. So if you are interested in using layaway as you're doing your holiday shopping, keep an eye out for information from those retailers when you're browsing their websites. And meanwhile, it seems like buy now pay later offerings from providers like Klarna, Affirm, or Afterpay are popping up pretty regularly when I'm checking out online. Are there certain types of retailers that tend to offer BNPL as opposed to others? Yeah, honestly, you can find it just about everywhere now, but especially those big box stores and retailers that specialize in things like apparel, electronics, beauty, and home goods.

As Anna mentioned at the top, buy now, pay later is becoming popular with Gen Z. A recent payment survey showed that 68.5% of Gen Z respondents were likely to use BNPL this holiday shopping season. Lauren, any insights as to why this is catching on with younger shoppers? I think part of it could be that this generation, like many folks right now, is feeling the sting of the high cost of living. And many Gen Zers are young adults, you know, those late teens and early 20s. And they may not have established credit or as high of an income as some people in older generations might. I think BNPL is appealing because in most cases it doesn't require a hard credit check and it can be easier to qualify for than a credit card.

Also, credit card purchases can be more expensive if you don't make the payments on time because of the interest. So no or low interest buy now pay later plans might seem like the more financially friendly option. Lauren, let's talk about the potential drawbacks of layaway and BNPL because neither is risk-free. Can either one impact your credit? A layaway plan is not going to directly impact your credit, for better or worse. These plans, as we mentioned, don't require credit checks, so there won't be a hard inquiry on your credit report and your score won't take a hit. The payments also don't get reported to the credit bureaus whether they're on time or not, so using layaway responsibly isn't going to help you build credit.

But there's kind of a catch if you use a credit card to make layaway payments that could indirectly impact your credit since credit card payments are reported. So if you make them, it could help build your credit, but if you miss them, it could also knock your credit. Most buy now pay later plans similarly don't require a hard credit check or report the on-time payments to the credit bureaus. Some will report positive payments or they might allow you to opt into that feature. So there is a chance those could help build your credit history, but it's not guaranteed. Buy Now, Pay Later has, I think, a bigger risk of hurting your credit if you have late payments. The account might eventually be charged off, which means it's written off as a loss,

or it might be sent to a debt collector, which could be reported to the credit bureaus ending your credit. Are there any fees or penalties with layaway or buy now pay later if you can't afford payments? It depends on the plan, but that's why it's really important that you read the terms carefully first. With layaway, there could be a cancellation fee or there might not be a fee at all, but in either case, you wouldn't get the item if you don't finish making payments. Some BNPLs charge fees or interest for things like rescheduled or late payments, especially the longer-term plans. And there's also that risk of a negative mark showing up on your credit reports. So let's assume that all

three options are available when you're trying to make a purchase, BNPL, credit card, and layaway. How can shoppers figure out the best option for them? One thing to think about is how urgently you need the item. If it's something you need right now, then you can rule out layaway because you have to wait for that. But you can also compare fees and interest rates to get a better sense for how much each option may cost you, especially if you can't pay on time. If you're trying to build credit, a credit card is probably going to be the best option for that. But I would also say consider whether none of these three options are the right choice. If you can't afford the item and it's not something you absolutely need, you probably shouldn't buy it.

I like the idea of asking yourself how urgently you need an item for another reason too. It could prevent you from buying something that you truly do not need and cannot afford. And I think that is the big risk with buy now, pay later versus something like layaway. Even QVC is doing buy now, pay later now. I mean, I was admittedly hate watching it the other day, and they had a number of products that you could buy for four installments of $6. It's easy to see how folks could rack up multiple buy now, pay later loans, have a hard time keeping track of of them and then maybe end up in a position where they can't afford all of these different loans they have scattered about. Absolutely. Buy now pay later is becoming so much more widespread, to your point, for purchases big and small. The other day I went to a bakery in my neighborhood and saw that they accept after pay, which surprised me. Wow, must be some expensive bread there.

Yeah, so I think it's safest for people to not have more than one buy now, pay later loan at a time. But if someone is going to use them more frequently, setting due date reminders can be a huge help or even setting up automatic payments. If you do use autopay, it's really important to make sure you'll have the money when payment comes due so that you don't risk getting charged something like an overdraft fee or interest depending on

your payment method. Lauren, any final tips for shoppers this season when it comes to choosing payment options or finding ways to save? I would emphasize again how important it is to read the details carefully if you're considering a layaway or buy now pay later plan just to make sure that you understand what you're getting yourself into. If you choose one of these plans, keep track of the payment due dates. And also, I think there's something to be said if you really want something, but you can't afford it without financing. Explore cheaper options first. There might be a less expensive dupe of the item, something that looks the same but isn't maybe from as high end of a brand. Or maybe you could find something secondhand. There are local buy nothing groups you can join

on Facebook and other sites where people often give away or trade some really great stuff. And a lot of retailers also sell open box items at a discount. There's a lot of creative ways to save money around the holidays. Lauren, thanks so much for being here. Thanks for having me. Up next, a few money headlines in the last few days. All right, Anna, it's time for the all-important monthly jobs report. And it was a bang-up number for November. Yeah, the Labor Department reported that the economy added 227,000 jobs last month. That was a significant increase over the October jobs figures, which were hurt by hurricanes and the Boeing strike. Wages rose too, with hourly earnings ticking up 0.4%. The unemployment rate, though, also rose from 4.1% to 4.2%.

This is one of those data points that will factor in when the Federal Reserve's Open Market Committee meets next week to discuss what's next for interest rates. The Consumer Financial Protection Bureau announced that it's returning $1.8 billion in junk fees to consumers who use credit repair companies. The agency says that more than 4 million people will receive payments for being charged advanced fees or being subjected to bait and switch advertising by Lexington Law and CreditRepair.com. This is part of a legal ruling by a judge back in August of last year that said the companies had violated laws against collecting fees before achieving promised results for consumers. Basically, they were charging money before actually doing the job.

After the court ruling, both companies filed for Chapter 11 bankruptcy protection. The CFPB says affected consumers will get payments in the next few weeks without having to do anything. And finally today, the Wall Street Journal did some digging and came up with a really interesting finding about investor behavior since the onset of the pandemic. Turns out, Anna, that individuals with investments in mutual funds increased their efforts to do something called market timing. Oh, this rarely turns out well. To review, market timing is when investors try to predict what's happening in the

stock markets and buy and sell based on those predictions. They're typically trying to time their decisions to buy low and sell high, of course, but more often than not, that's a fool's errand. Researchers at the Journal took a bunch of information on the trading of various mutual funds and came up with an estimate that the increase in this behavior cost investors who were trying to time the market roughly 1% off the value of their portfolios. That is nearly double the amount lost due to poor market timing between 2015 and 2019. In other words, they did not time their buying and selling well. And they certainly didn't do better than if they had just held on to those mutual funds over a longer span of time. And they found that this behavior got worse and worse from 2020 to this year. It makes some sense because A, we all had a bit more time on our hands for a while there,

and B, there was crazy stuff going on with things like the GameStop meme stock hype and its successors. So maybe just don't try to time the markets? Yeah, it rarely works out. If you're looking for ways to invest your money that aren't so risky, then you might want to check out NerdWallet's write-up of the best ways to invest your money right now. You can find a link to that in today's show notes, or just search for NerdWallet best ways to invest. That's it for this week's money news. We always welcome your money questions and comments. Turn to the nerds and call or text us your questions at 901-730-6373. That's 901-730-NERD.

Or send us a voice memo at podcast at nerdwallet.com. And remember, you can follow the show on your favorite podcast app, including Spotify, Apple Podcasts, and iHeartRadio to automatically download new episodes. Today's episode was produced by Tess Vigeland and myself and edited by Rick VanderKneife. Here's our brief disclaimer. We are not financial or investment advisors. This nerdy info is provided for general educational

and entertainment purposes and may not apply to your specific circumstances. And with that said, until next time, turn to the nerds.