Affirm and the Rise of Buy Now Pay Later: New Company, Same Old Bad Advice

Buy now, Pay Later.  Its a common term being pedaled lately by several new and rapidly growing financial companies.  Companies such as Affirm, Afterpay, and Klarna.  While the term has been recently re-popularized, the concept, and even the term itself being pushed, is far from new.


What is Buy Now Pay Later?


They brand themselves as convenient ways to shop.  More transparent than a credit card, with little or no money down required to make the initial purchase, sometimes without even charging interest.  No hard credit check required. Its a new way to shop, they claim.  One that reduces the ‘friction’ (or hesitancy) consumers have of making large purchases.   


With merchant fees ranging from 4-6% (2-3x what most credit card companies charge) the claim is that they make enough money off the merchants to help finance the consumer’s low interest purchase.  Like a modern day Robinhood, Its a financing company that looks out for the everyday buyer at the expense of the merchant.  More-so than the traditional credit card companies at least.  Or so they say…


But don’t believe the hype.


The truth is much more nuanced.  While it is definitely ‘different’ than a credit card, in many ways it is probably more similar than it is different, and in some ways it could actually be worse.


These companies claim to have an answer to the ageless question.  One deeply rooted in American consumerism:   How do you buy something you can’t actually pay for? How do you make a purchase you can’t actually afford?  Many others have come before, all providing similar answers to this question.  From Layaway to Credit Cards, Store Cards to payday advance loans, all seek to help the desperate consumer, needing to make a purchase but without the means.


Unfortunately these companies were never really in the business of helping anybody.  Have you ever heard of a ‘non-profit’ payday advance center?  No, these companies are in business to turn a profit, usually at the expense of the desperate customer. You see, the ‘solutions’ these companies offer are about as much a solution to this problem as drinking is a solution to a hangover.  Sure, it might numb you from the short term effects of your decision, but they’re actually just digging you into a deeper hole.  If you struggled to pay for things upfront before turning to “Buy Now, Pay Later” companies, surely you will afterwards with so much of your money tied up into paying off the purchases you unwisely made in the past.  


You see, the real answer to this question, with very little exception, is that if you can’t afford to buy something, You shouldn’t buy it!  Unless the item is a necessity (Food, water, shelter, that kind of thing) there’s no justification for splurging on something you don’t have the money for.  No, you don’t deserve to engage in ‘treat yourself’, ‘indulge yourself’ behaviors.  You need to buckle down and learn to manage your money.  Are you really so broke that you can’t afford to pay for your recent clothing-fueled shopping spree?  Well, then maybe you shouldn’t have gone on one.  


Merchants and advertisers spend hundreds of millions every year on ads and influencers trying to convince us of all the things we supposedly need: The latest iphone, the Peloton bike, that Oatly Milk.  The list is endless.  


If you can’t afford to pay for an item you don’t need, you shouldn’t be buying the item at all.


Some may argue that there’s value to using a BNPL (Buy now, pay later) company as there may be a sale on an item that will be gone by the time you have the money saved.  Others, that it makes since to defer payment.  After all, you would never pay for a house in cash, so why would this be any different, especially if its interest-free?  Deferring payment temporarily gives you more cash on hand to invest.


But consider this.  According to Affirm’s recent IPO filing, over 31% of affirm’s revenue in 2020 came from interest charged to consumers. (See Here).  And After Pay, which charges no interest rates, still derived 13.25% of their 2020 revenue from late fees. (see Here).  The fact of the matter is, both of these companies still profit off of the consumers.  (Or at least they would, if either company were actually profitable at this point).


To the BNPL companies, the consumer is the product.  


Why BNPL is not necessarily better than credit cards


With Affirm, the interest rates can range from 0-30% depending on your credit.  If you have poor credit, your interest rate could be every bit as high as credit card interest would be.  And while its true that you’ll only get charged interest on the principal, you’ll also start paying interest from day one.  With a credit card, you have 3 weeks after the end of your billing cycle before interest starts accruing.  Also, with a credit card you have built in purchase protection, and can build your credit score.  With Affirm, you get neither of these two benefits.

Now you might argue that you’ll be better off using afterpay, as there is no interest charged as long as you pay your balance off on time.  But the truth is, you have 6 weeks to pay off your purchase (42 days), and the first 25% has to be paid immediately.  With a standard credit card you’ll have a minimum of 21 days, and potentially up to 52 days (depending on how recently your billing cycle started) to pay off your balance in full, also without being charged any interest.

So while BYPL may be better than a traditional credit card in some respects, it lags behind it in others, and honestly, you can see that there’s less of a difference between these two options than is often claimed.


When should you use BNPL?


The thing to remember with BNPL, is that these systems are extremely good at reducing the ‘friction’ (hesitancy) consumers have at buying an item.  Honestly, for the consumer, that friction is a good thing.  It keeps us from making too many impulse purchases.  It helps us stay disciplined in our budgets, only buying the items that we actually need.  If you are the kind of person that struggles with impulse purchases, that struggles following a budget, BNPL is NOT for you.  If however, you are the kind of person that is level-headed in their financial decisions, avoids impulse purchases, and is careful with their spending, than its perfectly safe to pay use BNPL systems.  Just be careful how you use them.  Remember that its easy to over extend yourself with these types of systems.


While its true that you would never buy a house in cash, its important to remember that discretionary spending is not the same as a hard real estate investment.  For one thing a home loan usually lasts for 15-30 years, and the interest rate is locked in below 5% most of the time.  If you were to invest the equivalent money in the stock market you would likely net a return on your investment between 400-1600%, much more than you would gain by simply avoiding mortgage interest.  But with a 42 day repayment period on After Pay, you have very limited time to do any real investing on that money, and as stated earlier, you could accomplish the same thing using a credit card.

And if an item is on sale and you were planning on buying it anyways, go ahead.  But take a minute first and ponder whether you really do need that item, and whether you really would have saved up enough money for it regardless.  Don’t get tricked into buying something you don’t need because you think its a good deal.


There may very well come a time when you are up against the wall and need to use such a system, but please don’t plan on relying on such a system.  Learn to better manage your money and put your money to work for you instead of working for your money.


Thanks for listening in


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