At some point, you’ve probably seen an ad with an offer saying something like: “Buy Now, Pay Later!” These ads often sound like great offers. And, when used with strict spending discipline, they can be a helpful alternative to traditional financing since they’re often interest free.
After all, paying $100 a month over 12 months is a lot easier to do than paying $1,200 up front.
However, if used too much, the whole “buy now pay later” (or BNPL) concept can quickly become a debt trap that can be difficult to escape. In fact, the deferred payments debt trap is something that has affected more than just retail—the student loan debt crisis was fueled in part by deferring payments until after college.
But before we get into the specifics, what is a debt trap?
What Is a Debt Trap?
Though sinister-sounding, a debt trap may not necessarily arise from malicious intentions. After all, businesses want to get paid for the stuff they’re selling without having to hire a collections agency, set up payment plans that defer income, or file costly court proceedings (outside of a few potential scammers, that is).
However, regardless of intent, the risk is still the same—falling behind on payments can lead to calls from collection agencies and even seizure of the goods you financed.
What Is "Buy Now Pay Later?"
Buy now pay later is a sales tactic that allows a customer to get a good or service and pay the cost at a later date. Different companies might structure their BNPL offers in different ways, so there’s no single standard for how a BNPL works across the board.
In most cases, the payment plan is interest-free (as long as you don’t miss a payment, that is), so the cost of the item doesn’t increase. Often, this is compared against using a credit card, where you’d have to pay interest on any portion of the balance that you didn’t pay off before the end of the billing period.
Some BNPL offers require regular monthly payments, while others might only set a goal of paying off the totality of the debt by a specified date in the future.
The concept of BNPL has taken off in recent years. According to a press release from ResearchAndMarkets.com, BNPL has shown strong growth during the COVID-19 pandemic and is expected to grow by 41.1% on an annual basis in 2021.
In short, deferred payments for goods and services is an extremely popular option for many Canadians who are hard-pressed to come up with the funds for major expenses up front.
However, as good as buy now pay later plans may sound, it’s extremely important to use them with caution, as they can become a debt trap for many spenders.
Why Deferred Payments Can Be a Debt Trap
So, how can deferring payments become a trap that makes it hard to get out of debt or become a major source of debt?
There are a few different debt management problems that “buy now pay later” offers can introduce:
1. They Encourage Impulse Spending
“Sticker shock,” or the dismay experienced by a potential buyer on seeing the price of a high-cost item or service, can be a major obstacle to impulse buying. This is good for consumers, as a big price tag makes them really consider if they need that product or service.
Deferred payments like BNPLs decrease the impact of sticker shock since it transforms one big price tag into a series of smaller payments.
This, in turn, encourages extra impulse spending.
2. Multiple BNPL Offers Can Add up Quickly
Debt from deferred payment plans can add up surprisingly quickly. Unless you’re closely monitoring your monthly spending with some kind of expense tracking and budget planning solution, it’s easy to forget how much money you need to set aside for your BNPL payments.
For example, say that George was shopping in his local big box retail store and saw a big new fridge with a built-in water/ice dispenser. The fridge costs about $1,700, which he can’t afford up front. However, with a BNPL plan, he only has to pay $170 a month for 10 months. That’s a lot easier to swallow.
Then, next month, George realizes that his stove is a little run down and is looking to get a new one. He finds one for about $2,500 that has all the fancy features he wants and gets it on a BPNL offer for $250 a month. Then, he decides to install tile flooring in his kitchen for about $10,000—broken up into monthly payments of about $500 for 20 months.
Now, George is paying $920 a month just on his “buy now pay later” purchases. That’s a lot of money to set aside for things that aren’t basic necessities. This makes it harder for George to set aside money for an emergency, pay for utilities, keep up with his credit cards, and buy groceries.
3. They Can Be Easy to Forget
Some BPNL offers don’t require regular monthly payments. Instead, they ask for the full sum to be paid by some specific date in the future (usually 6-12 months out). These sellers might not send any notices, reminders, or invoices until time is almost out. Then, once the BPNL due date passes, the full sum becomes due—possibly with interest.
For example, say that Sally went on an online shopping spree. She bought some big ticket items on a BPNL offer—spending nearly $5,000. Five months later, she gets a notification in her email from the online retailer: “Reminder: Your Pay Later Balance Is Due Next Month.” In the email, she gets a detailed list of what she bought, how much she owes on the BPNL plan, when the full balance is due, and what the interest rate for the purchase will be if she misses the payment date.
With $5,000 in debt and a monthly income of just $6,000 with little to no savings, Sally’s in a really tight spot. If she dedicates all of her income to just paying the BPNL, rent, utilities, and other basic necessities, she might just barely pay it off in time.
Imagine if the BPNL offer had come from a less reputable source—one who specializes in selling products at an inflated rate, repossessing them when people can’t keep up with the payments, and not sending timely reminders to ensure that people remember their obligations. Sally could have had her items repossessed and been stuck dealing with collection agencies!
Need Help with Debt Management?
Whether you’ve fallen behind on deferred payments, have out-of-control credit card debt, or just need some advice on basic money management to help you stay debt-free, Credit Canada is here to assist!