The increasing financial pressure from real-life expenses, such as grocery shopping and paying high rent, is prompting more Americans to turn to deferred payment options, making this service very attractive to some consumers. These plans, known as “Buy Now, Pay Later” (BNPL), can be used for expenses such as clothing, healthcare, entertainment, groceries, or dining out.
However, at what cost to consumers?
These services offer short-term loans that enable consumers to purchase products and services, with the option to repay the amount in a set number of installments over a predetermined period.
The most prevalent BNPL model is known as “4-in-6” or “pay-in-four,” where consumers settle a purchase in four equal, interest-free payments: The initial payment is made at the point of sale, followed by the remaining payments in three bi-weekly intervals.
This service can seem like a quick convenience. During tough economic times, something you need but can’t afford can easily be purchased using credit products like Affirm, Afterpay, or Klarna. Your payments are spread out over several weeks to months, typically consisting of four payments over a six-week period. You can select when and how you pay it off.
However, the Most Honorable Elijah Muhammad, Eternal Leader of the Nation of Islam, warned Black people about unnecessary spending or spending beyond one’s means. “The first step the so-called Negro wage-earners should take is to spend only when necessary and according to their income.
They should save as much of their salaries as possible—weekly, biweekly or monthly,” the Most Honorable Elijah Muhammad wrote on page 195 of His book, “Message To The Blackman in America.”
He continued, “We, as wage earners, should always plan to save something from whatever we are paid. Do not become extravagant spenders like the rich, who own the country and everything in it. It is sheer ignorance for us to try to compete in luxury with the owners.”
A recent survey found that approximately half of the population views the cost of groceries as a significant stress factor in their lives, with 19% of those worried having utilized deferred payment services for groceries at some point. In total, 29% of people have used deferred payment services, with a higher prevalence among individuals under 45 compared to older adults.
The AP NORC (Associated Press) National Opinion Research Center) survey found that 53% of adults reported that grocery expenses are a major source of stress, and another 33% said they are a minor source of stress.
About half also identify housing costs as a significant concern—additionally, 43% express stress related to their income and savings. Healthcare costs are also a significant source of stress for four in ten adults.
Increasing prices and more days left in the month than Harrison Thompson had money to cover seemed to be a recurring source of stress. His paycheck used to stretch further and do more for his family, but lately, with rising rent, gas, and occasional outings with his wife, by the middle of the month, he was broke until his next paycheck.
Mr. Thompson said though he has tried these services he did express caution because these services do not solve the problem of rising prices.
BNPL options may be too good to be true for some people. A recent survey by Lending Tree asked people about their behaviors and perspectives regarding these popular loans. It found that more than four in 10 (41%) users of BNPL loans reported paying late on one of them in the past year, up from 34% just a year ago.
The survey found that, surprisingly, high-income borrowers are among the most likely to pay late, along with men, young people, and parents of young children. Other key findings include that nearly one in four BNPL users (23%) report having three or more active BNPL loans at the same time.
A closer look at these products reveals that they often come with hidden costs and risks, including late fees, higher interest rates, and increased overdraft fees.
By breaking down purchases into smaller installments and providing access to interest-free credit, the smaller, interest-free installments may also lead some consumers to perceive purchases as more affordable than they are, increasing the risk of overspending, debt accumulation, and even default.
What happens if you don’t make your payment on time? Mounting late fees will accrue. Fumiko Hayashi and Aditi Routh from the Federal Reserve Bank of Kansas City examined the financial challenges and payment behaviors of people utilizing Buy Now, Pay Later. They found that BNPL users are often more financially at risk than non-users.
Their study also showed a strong connection between late payments on BNPL loans and financial difficulties. This suggests that some BNPL users who pay late may have overspent or taken on too much debt with BNPL.
According to Consumer Reports, BNPL comes with several risks, including negatively impacting a person’s credit score for missed payments.
The Honorable Minister Louis Farrakhan, National Representative of the Most Honorable Elijah Muhammad, has cautioned Black people in several public addresses that “debt is slavery.” The Most Honorable Elijah Muhammad also stressed to, pay your debts!