Happy November! The air is getting colder here in New York and holiday shopping is in full swing. Thanksgiving is coming, which means so is Black Friday. Just as we are thinking about our holiday shopping, we must also be smart about our holiday spending. November and December tend to be the most expensive months between gift shopping, holiday travel, and expenses related to hosting holiday gatherings.
Fortunately, there are several large companies offering to help consumers with our holiday spending. If you’ve been following my posts, you know this is a trap. Companies are in business to make money and satisfy shareholders. There is nothing wrong with that if they conduct business in an honest and ethical manner. However, some business models have unintended consequences and this post is going to focus on “buy now, pay later” offerings.
The concept of buy now, pay later (BNPL) is simple. A company steps in to assist customers in making purchases large or small by allowing them to make payments over a period of time. By now, almost every major retailer and many smaller ones have begun to offer this service to attract customers. This attracts two types of customers. The first group can pay for the purchase in full and the cost of spreading out the payments is not a deterrent so they take a payment plan. The second group is the one I’m more concerned with. This group may not be able to afford a purchase at that time, but will saddle themselves with a payment plan that may prove to be costly.
Based on my own online shopping, the two main BNPL companies are Affirm and Klarna. They work similarly in that they provide flexible payments at checkout so you can make a purchase and pay it off over a period of time. They both offer the option, on certain purchases, to make four bi-weekly payments, interest-free, in addition to longer financing. While Affirm will let you finance a purchase over 48 months, Klarna will only give you 36 months. The merchant may cap the term or the companies will set limits based on the size of the purchase or credit-worthiness.
I must confess that while I have never used either, I did peruse both company websites and picked four random stores (Target, Macy’s, Walmart, and Neiman Marcus) to start a test order. Affirm broadcasts no fees throughout their website. Even in their FAQ section they note that they don’t even charge late fees. However, they may still report late payments to the credit bureaus. If you opt for monthly payments rather than the interest-free option, the interest rate ranges from 10% to 30%, which is comparable to credit card interest rates. I stopped a test purchase before allowing them to do a soft credit pull to see what rate they would offer me.
Klarna offers more than Affirm as their online shopping app makes it even easier. They also offer single-use virtual cards to keep purchases more secure. They charge late fees, even on the interest-free payment option. Klarna lists the annual percentage rate (interest plus other fees) ranging from 0%-24.99%. Again, you have to go through the application process before knowing whether you hit the rate jackpot.
So how do these companies make money? Fees are actually secondary for these companies but they certainly won’t mind collecting them. The primary source of income for these companies are commissions earned when customers use their service while shopping. They earn a commission on every sale so the merchants are paying them for helping customers make purchases.
The danger with both of these programs is that people will now feel more comfortable making large purchases that they may not be able to afford, or create new monthly obligations that will put a strain on household budgets. There’s no harm in paying off an item interest-free over two months if you can make the payment. Creating a long-term payment obligation with a high interest rate will make that purchase significantly more expensive beyond the monthly bill that must now be paid.
As we enter the holiday season, please be safe and be smart. Shop within a budget and do not make 2021’s shopping a 2022 problem. We will already have enough to worry about in 2022. Of course, if you find yourself struggling with debt, there could be a number of options to help eliminate that debt. Contact Zimmelman Law PLLC and we can explain each option and create a personalized solution.
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