What's "Buy Now, Pay Later"?

The Pros and Cons of Using Buy Now, Pay Later Apps

One of the most common questions I get asked when I speak at events or meet with groups of students is, “How can I afford to buy a house?” This question comes up a lot because people see home ownership as a key part of the American Dream. If you’ve ever been curious about how much your home is worth, you can use an online home appraisal tool like Zillow to get an instant price estimate for any home.

One of the biggest fears that comes up time and time again when talking to students is not being able to afford a down payment. There’s a common misconception that putting money down on a house is expensive. In fact, the opposite is usually true. It’s most often cheaper to pay cash. And while a 20% down payment might sound like a lot, you can get a mortgage with as little as 3.5% and save the rest for later.

There’s a big difference between “paying cash” and “paying with your mortgage.” When you pay cash, you’re actually putting money down on the item. When you make mortgage payments, the item is technically owned by someone else until you make the final payment. If you’re worried about being able to afford a down payment, you can use a private mortgage loan provider like TIGER to get a personal loan with an interest rate that’s most often lower than what you’d find for conventional financing.

Another common question I get asked when talking to students is, “Is it normal to spend so much on food?” When you’re paying so much for rent and school fees, it can be tough to find money for food. But you’ll find that eating healthy is often cheaper in the long run. When you eat healthy, you’ll also be able to spend more time working out, which in turn could help you earn more money. If food is a concern, you can get a meal plan at school or look into joining a student farm club to get discounted produce.

There are a lot of myths about buying a home. One of the most common is that you need a large down payment to buy a house. That simply isn’t true. You can get a good home with as little as 3.5% down. And what’s more, you don’t necessarily need to put down a large down payment to buy a house in your area. You can use mortgage calculators like the one from GoBanking to find the best mortgage for your situation. Don’t be afraid to ask for help if you need it. Your parents may be able to help out with the down payment or offer some tips on how to save money. The key to affording a house is understanding how mortgages work and finding a lender that you feel comfortable with.

You’ve probably heard of the popular buy now, pay later apps such as EBay, Shopify and Square Cash. These services allow potential buyers to purchase an item with the understanding that the cost will be debited from their debit card or bank account at a later date. In general, these services help consumers manage cash flow effectively and safely.

Although the concept behind these apps may sound appealing (and it is!), there are a few significant considerations that you should be aware of before making a purchase through one of these platforms. Below, we’ll discuss some of the pros and cons of using buy now, pay later apps to make purchases.

Pros

Many consumers have embraced the conveniences that these apps offer, and for the most part, the benefits outweigh the risks. Here are some of the things that you should know and consider before using these apps to make purchases:

Convenience

If you’ve ever shopped on Amazon, then you know that one of the biggest draws is the convenience of online shopping. With the click of a button, you can have products delivered to your door in less than an hour. For those of you who hate going to the store, shopping online is the perfect alternative.

Similarly, with the buy now, pay later apps, you don’t have to worry about parking, finding a parking space or facing rush hour traffic to get to the store. You can do all of your shopping from the comfort of your home. For those of you who hate spending money on gas, parking or long hours at work, using these apps is ideal because it offers a convenient way to save money while spending less time at work.

Embrace the conveniences that these apps offer and you may find that you greatly enjoy shopping through them. In fact, if you’re looking for something specific and it’s not in stock, you can make an order and pay at a later date. Similarly, you can track the status of your order online and ensure that your product is delivered as promised. All of this convenience means that you may end up spending a little more money, but it’s still an overall savings compared to traditional shopping channels.

Security

Like with all apps and websites, security is an important consideration whenever you’re shopping online. Fortunately, the buy now, pay later apps and platforms take security seriously and implement robust security measures to protect your personal information. Square, for example, requires two-factor authentication for all of their sellers, and they use a secure socket layer (SSL) to encrypt your personal information as it travels to their servers.

Although it’s not always the case, in general it’s a good idea to purchase items from trusted merchants who’ve implemented all the necessary security measures to reduce the risk of fraud. In the event of a fraud attempt, you can contact the bank or credit card company to have your account reinstated as soon as possible. In the meantime, you’ll have to notify the police and be on the lookout for this type of behavior.

Flexibility

One of the best things about the buy now, pay later apps is that they offer flexibility. When you use them, you have the option of setting a payment method (credit card, bank account or both) and an expiration date (to be used in the future). That way, you can ensure that your credit card will be active and you won’t have to worry about paying with a different card at a later date.

Depending on your personal situation, you may want to consider using a credit card for some purchases and setting up a separate bank account for other transactions. For example, if you’re using a credit card to make an online purchase that costs $1,000, but you have enough money in the account to cover the cost, then you may not need to set up a payment plan with a lender. Alternatively, if you have an existing banking relationship and you’re looking to make smaller purchases, then you may want to open up a separate savings account for that purpose.

Freedom

One of the best things about the buy now, pay later apps is that they offer freedom. When you use them, you have the option of setting a due date (to be paid at a later date) and can notify the seller and the credit card company that you’ll be paying them at a later date.

This way, you can avoid worrying about whether or not you’ll have the money to pay at the end of the month. As long as you notify the vendor and credit card companies when and if you do decide to pay them, they can take it into account when determining your credit card’s available credit.

In the event that you do not have the money to pay at the end of the month, you can contact the bank or credit card company to update your payment plan. In general, using these apps to make purchases gives you more freedom than shopping with a credit card alone, and that’s a good thing.

Cons

Although there are a lot of benefits to using a buy now, pay later app to make purchases, there are also some significant concerns that you should be aware of before using these services.

Privacy

One of the main concerns when it comes to online shopping is privacy. Specifically, as mentioned above, security is a significant issue whenever you’re shopping online, and this carries over to the buy now, pay later app situation. Even if you’re using well-known sites and reputable merchants, you’re ultimately giving your information to a third party; the virtual store.

When you use these services to make purchases, you’re giving your personal information to marketing firms and payment processors who work with these services. The next time you make an online purchase, whether it’s through a traditional website or a mobile app, you’ll be asked to log in with your email address and password. If you don’t want to provide this information, then you should avoid using these services to make purchases. For best results, use a different credit card or bank account for online shopping and be sure to sign up for text alerts from your selected card company. This way, you’ll be able to keep tabs on your account and make sure that your credit card is not being misused.

Creditworthiness

Another significant concern whenever you’re shopping online is the issue of creditworthiness. In the event that you decide to pay for merchandise with a credit card, then there’s a chance that your credit card company may question your creditworthiness. Although you may have enough credits to cover the cost of the items in your shopping cart, there’s still a chance that the credit card company could decide to not allow you to make the purchase. As a result, you may find that you’re unable to complete your order.

When using one of these services to make purchases, you’re giving your personal information to a third party who will use this information to determine your credit card’s available credit. In the event that your credit card is not currently registered with the service, there’s a chance that they may decide not to approve you for credit. When that happens, you’ll have to find another way to pay for the items in your cart. It’s important to note here that once you give your information to a third party, it’s difficult to get it back. In the event that you decide to cancel your order, you’ll have to contact the merchant directly. As a result, you may end up losing all of the information you provided to the third party.

Banks

A major issue that comes up whenever you’re using these services to make purchases is banks. The primary issue here is that most banks will not allow you to open an account simply because you use one of these services. If you want to use a credit card to make a purchase through one of these apps, then you’ll have to open up an account with a different bank. Alternatively, if you want to use a bank account to make an online purchase, then you’ll have to set up direct deposit from your bank account into your merchant’s account. Both of these options add an extra step to the process and may result in unnecessary complications.

Fees

These apps and platforms charge fees for each purchase that you make. Square, for example, takes a 2% fee for all credit card purchases made through their platform. Whether or not these fees are reasonable is completely subjective, but it’s important to keep in mind that you’re paying them whether you use these services or not. In most cases, the fees add up quickly and make the overall savings from using these apps not worth it.

Post-pandemic, it’s a whole new world for personal finance.

For generations, saving was seen as a crucial element of life, but the mantra ‘consume, spend, repeat’ permeated even the most virtuous individuals.

Thanks to technology, however, the way we consume, spend and save has changed.

While the fundamentals of budgeting and planning remain the same, the digital nomads of today ask themselves different questions about money. Is it safe to spend? Can I borrow against my possessions? Can I treat myself to something now that I can pay for later?

We looked into the evolving role of credit and decided to sort the truth from the fiction.

What Is Credit?

To lend money and obtain credit in return, one must qualify for a loan. The qualifications include having sufficient income and the capacity to repay the loan – the so-called ‘liability’ and ‘assets’ of the debtor.

Credit is thus a type of payment that acts as a guarantee that you will repay the lender should you fail to do so. In early modern times, the only available credit was from a bank, and it came with strings attached. Those who couldn’t pay back the loan would be shut out of the market, and the credit card companies effectively had a monopoly on lending. This is no longer the case. Thanks to the invention of the mortgage backed security in the 1970s, there are now many different types of credit available, from credit cards to non-traditional loans like trilogies and CDOs.

Buy Now, Pay Later

Over the past decade, the so-called ‘buy now, pay later’ (BNPL) trend has taken the world by storm, with many providers following suit.

This type of finance effectively abolishes the need to pay back the loan in full at the end of each month. Instead, the customer buys an item, makes a cash payment every three months, or at the end of each year, and adds another payment on top of that. In this way, the balance is paid off over time.

Many are lured into this type of financing by the allure of easy monthly payments with an interest rate that fluctuates based on the market. The fact that these products are often marketed towards millennials makes them even more appealing.

As the economy has evolved and more people have adopted this approach, so has the type of item that is eligible for BNPL. Not only are items for sale that you can pay off in installments more affordable, but many necessities like food and fuel are gradually being incorporated.

Not only does this make the concept of budgeting much easier, but it also allows for occasional ‘spending’ that wouldn’t have been possible beforehand. While this sounds like an appealing proposition, it can also be difficult to know where to begin.

Applying For Credit

If you’re looking to establish credit, the first step is to determine your credit score. Your credit score ranges from zero to 850 and is based on your payment history, the amount you owe and the length of your credit history. This is key as it will dictate which loan products you are eligible for, as well as how much you’ll need to borrow.

Your score can change depending on whether you make your payments on time or late. So if you’re looking to build up your credit score, it’s important to pay your bills on time. Another important factor behind your credit score is how long you’ve been using credit. The more you use it, the more your score will improve.

The Effect Of COVID-19

During the pandemic, the world has changed. Even those who managed to keep their jobs have seen their paychecks temporarily reduced as employers adjusted their budgets to account for the increased costs of labor and materials. This has opened up a world of ‘what ifs’ for those who were counting on a certain level of income to pay for their everyday expenses.

Retail stores that were unable to maintain a steady stream of customers have either closed down or found alternative ways to operate during the pandemic. This has resulted in many new challenges for consumers and their finances.

The burden of debt has increased as the cost of living has increased. Consumers who were able to keep up with their regular expenses are now struggling to make the payments on time while paying off their loans. This is resulting in a surge of delinquent borrowers who may be tempted to give into their desire for instant gratification and use credit to make purchases they cannot afford.

Although many banks and credit card companies have closed down or limited the types of credit that can be accepted, alternative financing vehicles like peer-to-peer platforms like Lending Club have emerged to fill the void. Lending Club and similar platforms create a marketplace for individuals and businesses to connect with lenders.

The increased access to credit during the pandemic has undoubtedly made a difference- some good, some bad. In the U.S., the Consumer Credit Availability Index (CCAI), which measures the volume of credit available to consumers, rose by 27% in the fourth quarter of 2020 compared to the same quarter in 2019. That’s according to the Federal Reserve.

While the availability of credit certainly increased, much of the new credit was likely illiquid or highly geared towards mortgage lending. As the economy begins to slowly rebuild, it will be important to ensure that proper budgeting and financial planning is restored as a means of securing prosperity.

Many consumers have a bad habit of paying their bills on time, but they often make the mistake of thinking that their credit score is unaffected by their payment history. But what about those with bad credit? Can they really pull off a positive score despite their payment history? Let’s take a look.

The Impact Of Payment History On Your Score

Even if you’re among the 94% of Americans who pay their bills on time, your payment history still has an effect on your credit score, particularly if you have a poor payment history. If you’re looking for a new credit card, you may be wondering how your payment history will fare against your application. While you should expect to see a decline in your credit score as a result of your payment history, you may also see an increase as long as your credit utilization is below 40%. Here’s a breakdown of how the credit score formula works.

The three major credit bureaus, Equifax, Experian, and TransUnion, calculate your credit score based on the following:

• payment history
• amount of credit
• the age of credit
• type of credit
• whether you’ve been married or divorced
• the number of children you have
• length of mortgage
• whether you’ve been thrown out of a job or home
• any collection accounts
• amount owed
• whether you’ve been hit by identity theft
• and many more factors!
• If your score is below 600, you may qualify for some credit cards that offer rewards.

Getting A Free Score

While you’re waiting for your credit score to be updated, you may want to take the time to request a copy from one of the credit bureaus. To get started, you’ll need to answer a few questions about your personal and financial information, which you’ll have to provide in order to get the score. Once you’ve completed the short application form, you’ll receive your score in the mail within 10-14 days. Once you get your score, you may want to get it verified at a credit score website in case there was an error in the methodology used to calculate it. For example, if you’re unable to find a balance on your credit cards, the lender may have mistaken your pending charge for a cash advance or loan against your future wages and instead counted it as a credit card debt – which it most certainly is not!

Payment History And Your Score

After you get your score, you may want to examine it closely as it pertains to your payment history. Most credit card companies use the FICO Score®, but some also use the VantageScore® and the Equifax Experian CRIS® Score®. If you have a score of 680 or higher, you may be considered a “creditworthy” applicant and be given the opportunity to accept the credit card offer with terms that are favorable to you. With this type of score, even those with a poor payment history may be able to pull off a positive result. Keep in mind that this is only true if your credit utilization is below 40% and you’ve kept your credit cards active for the last 12 months.

What About Those With Bad Credit?

If you have bad credit, you’ll need to do whatever is necessary to get back on track, which may mean paying off old debts and establishing a solid payment history. The thing is, your payment history still impacts your score, even if you’ve had bad credit for a long time. If you’re looking for a new credit card, you may be wondering how your payment history will fare against your credit application. Will they consider your long history of debt or your recent bankruptcy? Fortunately, there’s an answer. While your credit score may decline as a result of your payment history, it may also increase as long as your credit utilization is below 40%. Here’s how it works:

In case you haven’t guessed, those with bad credit scores are usually at the complete mercy of creditors. When you have bad credit, it’s almost as if all the money you make is immediately garnished by the bank or finance company you owe. Because of this, creditors are usually willing to work with you as long as you’re making an effort to pay off your debts. However, it’s important to understand that this is not always the case, and some creditors may still want to keep you as a debtor simply because they feel you’ll never be able to repay your debt. But as long as you keep your head above water, they tend to leave you alone. In other words, your payment history and whether or not you’ve been able to maintain a certain level of creditworthiness is usually what determines whether or not you’ll get favorable treatment from creditors when it comes to your debt. If you have a long history of poor payment, it may be difficult to recover your score, but if you’ve kept your debt under control and are currently making payments on time, you may see an increase in your score as a result.

Summary

The best way to look at it is this: your payment history still has an effect on your credit score, even if you’ve had poor credit for a long time. If you want to improve your score, you may need to take a hard look at your spending habits and get out of debt. But it’s also important to understand that your payment history will determine whether or not creditors are willing to extend you further credit. If you have a history of poor payment, you may find that it’s difficult to get approved for new credit cards and loan offers, but if you’ve controlled your spending and paid your bills on time, you may see your score improve as a result.