Gen Z Loves ‘Buy Now, Pay Later,’ But What Does a Financial Expert Think?

In the “good old days” (whatever that means anymore), people often used layaway to purchase items when they couldn’t afford to plunk down the entire sum. It was popular during the Great Depression, but the arrival of the credit card in the ‘80s brought about its sharp decline.  Now, in recent years, a slew of companies are popping up to resurrect the service for Millennials and Gen Z.  Affirm, Klarna, Afterpay—you’ve probably seen one or many of these options when you go to check out of your online shopping spree. But though similar, it’s not quite the same as the layaway your parents remember. How does “buy now, pay later” work? And is it even a good idea? Here’s what a financial advisor wants you to know.  

Priya Malani is the founder & CEO of Stash Wealth, a financial advising firm that serves young professionals. Prior to starting Stash Wealth, Malani was a vice president at Merrill Lynch. Her advice has been featured Refinery29, CNBC, BuzzFeed, NerdWallet, The Wall Street Journal and others.

Similar to layaway, “buy now, pay later” (BNPL) platforms break up the cost of your purchase into smaller chunks to be paid over a set period of time. The main difference is that with layaway, someone had to pay in full before they could take their product home. BNPL allows the person to receive their item before the balance is paid.

As explained by Investopedia, when you engage in a BNPL plan, you agree to a small down payment and a set plan (typically over weeks or months) to settle the balance. To obtain it, the company may run a soft credit check. (Some do hard pulls, so make sure you do your research.) The loan is interest free, but some payment plans allow you to choose a longer period of time to pay back the loan with interest. There is a potential that the loan will be reported to a credit bureau (which could positively affect your credit, should you pay it back on time), but if you default, you could incur fees or interest, and the financial services company you used typically reserves the right to send you to debt collection. Additionally, if you default, your credit score would be negatively affected, if the loan was reported.

On TikTok, the hashtag #afterpay has 198.3 million views. So, what’s the draw?

“Two words: instant gratification,” Malani says. “Buy now/pay later is appealing to consumers because, at that exact moment, we are looking to rationalize our purchase.” However, she cautions that you can still run into the same trouble as you would with a credit card. It all comes down to knowing what you can afford.

“BNPL provides an avenue to ‘easier’ spending, but you are still paving the way for another delinquency if you cannot afford what you’re purchasing. Just because your card doesn’t get denied at checkout does not mean you can afford it.”

According to The Atlantic, one of the big draws of BNPL is the ability to break up the purchase price at zero percent interest, instead of being on the hook for the full amount up front. Though, like a credit card, this is only true if you pay your installments on time. Otherwise, interest rates could be in the ballpark of 36 percent, which is similar to those of credit cards. The only reason BNPL loan defaults haven’t made the news, says Malani, is because the method is still so relatively new, so folks haven’t had time to rack up significant debts.

When it comes to deciding which to use, it’s good to keep in mind what each service can do for you. BNPL is made to help people pay off purchases over time, while credit is not. On the other hand, you may not reap as many rewards as if you paid with a credit card—things like cash back, points and a strong credit score which can help you secure things like mortgages down the road.

“If it is a relatively small purchase and breaking that payment down is the only way for you to afford it—given you pay the balance off in full and on time—utilize BNPL,” Malani says. “A credit card should never be used to pay something off over time unless it’s at zero percent APR. Typically, for larger purchases that may take more time than most BNPL offers allow for, utilizing a credit card with a zero percent interest rate could be an option.”

It’s also worth noting that if you do use these services, you want to make sure it’s not causing your overall spending to balloon; a recent study revealed that those who use BNPL have increased their total spending by about $60 per week. Ultimately, whichever you choose to use, Malani stresses the importance of having a solid financial plan.

“The root issue with credit cards and BNPL is that we are moving through life [financially] without a plan in place or really knowing what we can and can’t afford,” she says. “There is nothing inherently wrong with BNPL or using a credit card for points and reaping the benefits wisely. However, if you are spending money you do not have, you will end up in debt.”