Have you noticed how many stores and online shopping sites now offer the option of doing installment payments? Have your kids asked to use these services?

Called “buy now pay later (BNPL)” services (or point-of-sale loans) these services have earned the nickname “buy now, pain later” since they let you buy things today you can’t afford, by deferring smaller payments into the future. 

Gen Z (10 – 25 year-olds) have spent 925% more through these services today than they did in January 2020. But instantaneous loans plus social commerce (selling products directly on social media) are a dangerous combination that could jeopardize their financial futures.

How does BNPL work?

• You open an installment payment account linked to a bank account or credit card.
• When you make a purchase, you choose the service and pay according to a fixed, scheduled, preauthorized model.
• You can buy big ticket items, like laptops or TVs, or lower cost purchases, like a $200 pair of sneakers, and pay several smaller installment payments spread out over time, rather than one large upfront payment. 
• With some BNPL services, as long as everything is paid off according to schedule, your purchase is usually interest-free.

What are the pitfalls? 

• When spending has already become frictionless, increased spending power makes it easy for your spending to get ahead of your income.
• If you miss a payment, with some services, it could result in interest and fees.
• If you linked your credit card to the BNPL service, you’re also subject to your card issuer’s terms and conditions.
• One third of BNPL users admitted making a late payment and 72% said their credit score fell. That may mean higher borrowing costs in the future.
• Amongst Gen Z users, 43% have missed at least one payment and 30% have missed at least two.

What are some solutions?

• Try to delay gratification and save up for purchases.
• Try to confine your spending to cash or debit, so you can’t spend more than you have.
• Use your credit card, which already lets you buy now and pay later if you pay off the balance in full on the due date.