As with all financial products, BNPL schemes still require discipline.
Buy now pay later (BNPL) schemes are incredibly popular with millennials so I thought it was time to stop writing about them and give them a spin.
The appeal of BNPL is fairly obvious – none of those shockingly high interest payments that regularly get those using credit cards stuck in a nasty trap.
Instead, the BNPL promise is that your repayments are spread around to make them more affordable, although there are some fees involved if you are late.
I agree with the idea that BNPL can be an aid to budgeting but what really interested me was whether there were any traps similar to the credit card lobster pot – easy to get into and hard to get out.
Indeed, my personal approach to credit cards – honed after decades of delicately exploring their strengths and weaknesses – is that you need to have an iron clad rule to pay them off in full every month, even using an overdraft if you need to get that balance down to zero.
Any moments of weakness around Christmas and before you know it that credit card balance has risen to Everest-like proportions that will take until the next festive season to deal with and the interest costs are enough to give you a nosebleed.
Getting started on the BNPL ladder was simplicity itself, you simply go out and start spending – something the lady of the house was pleased to help me out on.
I started off really strong with a $10,000 deposit on a new car and then kept up the pace with a brace of household items that had been sitting on the “to buy” list for quite a while.
Like all splurges it was very pleasurable – getting a rush of items quickly makes you feel great and the atmosphere at home was particularly warm.
Initially the repayments were not much of a problem either – my credit card supplier had launched itself into the BNPL space and was happy to put the car deposit over 10 months so the repayments started off as quite manageable.
I was doing an experiment here, so how far could I push it?
I started doing the equivalent of the old trick of paying off one credit card with another one – my credit card provider was so keen to push the virtues of BNPL that I could simply click a mouse on any purchase and turn it into four easy payments.
It took a while but after a few months of this before I finally glimpsed the Achille’s Heel of BNPL – as long as you keep up the repayments it just keeps on offering more money to keep on spending.
I suppose in my case there was some sort of credit limit because eventually the credit card would run out of leeway, but I still had some room to move on that front and it was getting uncomfortable.
Just like the credit cards of old, this BNPL frenzy was turning into something of a monster, claiming an unseemly amount of my future cash flow before it even arrived.
Like all financial products, this one required discipline – something I had ignored for the purposes of this experiment.
Even though I had the cash resources to pay down the BNPL frenzy and hadn’t bought anything that I wasn’t going to eventually, it was a great insight into what would happen if you did not have a fall-back position.
It could be quite an unpleasant experience seeing every salary amount largely allocated before it even arrives with only the thought of falling deeper into the BNPL trap to do some more emotional spending as a form of solace.
So, it led me to formulate a rule similar to the credit card one – although I expect some would treat it with the sort of “OK Boomer” derision it probably deserves.
My BNPL rule is to set yourself a cast iron limit on how big you allow the total amount owing to get to right from the start and never get above it.
That limit should also be around what you can access from an emergency fund or – less desirable – an overdraft or some other form of hopefully low interest credit such as a line of credit home loan?so that you always have an escape should you need it.
You may not use the escape but just staying within a limit and knowing you can erase the BNPL debt at any time you want should put the trap into perspective and avoid any nasty and costly blowouts.
Don’t get me wrong, I’m actually a fan of BNPL compared to credit cards and particularly those horrendous payday loans.
Used with some discipline, it can be a worthy addition to the household arsenal of ways of getting through life with the least pain and the most gain.
However, it does have some dangers and for me the big one is that in the hands of a thoughtless spender it can keep growing like topsy and turn into a BNPL monster that can consume your life.
Set some limits on the spending and overall size and it can be a real winner.
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