Buy Now, Pay Later (BNPL) plans are marketed as zero-interest, bite-sized payment options, but BIF instructor and BIF Bites host, Jerry Mee unpacks the hidden costs and behavioral traps behind the trend. In this episode, he traces BNPL’s roots back to department-store layaway, explains why merchants happily eat 5% fees to boost sales, and warns that missed payments can push effective rates to 300%. Jerry also highlights debt-stacking, Gen Z’s 66% default rate, and the social-media mindset of “just declare bankruptcy” that fuels overspending. There may be safer alternatives, and he provides advisors with insight into discussing BNPL risks.
Become a CFP® Professional with BIF
If you're ready to elevate your career and provide more holistic, comprehensive financial plans to your clients, learn how BIF helps you achieve your goals. Download our free ebook, Become a CFP® Professional with BIF, and learn about the requirements, the CFP® Exam, and more.
Click Below to Read Full Transcript
00:00:08
Hello everyone, and welcome back to another awesome episode of the BIF Bites Podcast. I’m your host, and today we’re talking about the new kid on the block in financial transactions and short-term financing: the growing trend of Buy Now, Pay Later payment programs.
00:00:37
These plans are everywhere. Even if you haven’t used one, statistically about one in three listeners have. They appear on nearly every online checkout page, offering to split your total into four, six, or eight equal payments over time, interest free. That promise of zero interest has made them incredibly popular.
00:01:25
Programs like Klarna, Affirm, and AfterPay are leading the charge, and together they’re expected to surpass 125 billion dollars in sales by 2025. That is remarkable growth for such a new payment model. But this concept is not actually new. It is an updated version of something that dates back to the early 1900s.
00:02:22
Before credit cards existed, department stores used layaway programs that let customers make small payments toward big purchases. Once credit cards became popular in the 1970s, those programs disappeared. Now Buy Now, Pay Later has revived that old idea, built around the same key feature that made layaway appealing: little or no interest on purchases.
00:03:28
How can these companies offer zero percent interest even in a high-rate environment? The answer is that merchants make their money on sales volume. Offering financing helps them sell more, so they are willing to give up a portion of their profit margin. The difference is that today’s programs are run by third-party companies rather than the stores themselves.
00:04:29
These providers charge merchants roughly a five percent fee for each transaction. In exchange, the stores see higher sales and more customers completing purchases. For comparison, traditional credit card processing fees are about two and a half percent, meaning retailers pay nearly double to offer these plans, but the sales increase often makes it worthwhile.
00:05:16
So what is the problem? Merchants are happy, customers are happy, and the Buy Now, Pay Later companies are thriving. The issue is that the zero percent interest only applies when every payment is made on time. Missed payments come with high fees that can equal the same as paying a three hundred percent interest rate compared to using a credit card.
00:06:16
In those cases, customers are much worse off than if they had used traditional credit. This has led many financial experts and media outlets to warn consumers about the risks, with some even suggesting these programs could contribute to a future financial crisis.
00:06:57
Consider this: sixty percent of Coachella tickets were purchased through Buy Now, Pay Later. Food delivery services like DoorDash and Uber Eats now offer it too, meaning people are financing everyday purchases like pizza. That habit worries financial professionals because it encourages unhealthy spending behaviors.
00:07:48
This is an important topic for financial advisors to discuss with clients. Missing payments is not the only problem. The psychological and behavioral effects are just as concerning. These programs feed into impulsive spending and the fear of missing out. More than half of users report losing control of their budgets or overspending as a result.
00:08:59
Because these systems are so easy to use, people often have multiple active plans at once. Managing five or six overlapping payment cycles can quickly become overwhelming. This type of debt stacking makes budgeting difficult and raises the chance of missing payments and paying large penalties.
00:10:09
This issue is especially common among younger generations. Roughly one in three Americans has used a Buy Now, Pay Later service, but Gen Z shows the highest default rate at about sixty-six percent. That is a major concern for their long-term financial stability.
00:11:04
Younger generations have also grown increasingly ambivalent about debt. After years of economic turmoil, including the 2008 financial crisis, inflation, and rising costs, many young adults have adopted a carefree attitude toward borrowing. On social media, people even joke about putting everything on credit and filing bankruptcy later.
00:12:18
This mindset, combined with how easy it is to use these programs, encourages irresponsible financial behavior. While it might sound dramatic to say these plans could cause a financial crisis, it is important for advisors to address them seriously, especially with younger clients.
00:12:50
How can we counter the appeal of interest-free short-term loans? Ironically, traditional credit cards may be the safer alternative. Credit cards combine all purchases into one statement, making spending easier to track. And as long as the balance is paid in full each month, no interest is charged.
00:13:57
Credit cards also offer benefits that Buy Now, Pay Later programs do not, such as cash back, airline miles, and travel rewards. By using Buy Now, Pay Later instead of a credit card, consumers give up these potential perks.
00:15:00
Another major advantage of credit cards is consumer protection. When you use Buy Now, Pay Later, you are essentially paying cash. If a product never arrives or a seller is dishonest, there is little recourse. Credit cards, however, offer chargebacks and dispute resolution, protecting consumers from loss.
00:16:23
These protections are invaluable. Many people do not realize how useful they are until something goes wrong. Credit card companies can reverse charges and recover funds from fraudulent transactions, a safety net that Buy Now, Pay Later does not provide.
00:17:02
Advisors should still warn clients about the high interest rates on credit cards, but they should also emphasize the benefits of responsible credit use. The goal is not to avoid credit entirely but to use it wisely.
00:17:47
Interestingly, Buy Now, Pay Later usage is not limited to younger people. Adoption rates are similar across age groups and income levels, averaging around thirty to thirty-five percent. This shows that the psychological pull of delayed payment affects everyone, not just those in financial distress.
00:18:54
Even high-income earners who could easily pay in full often choose these plans because it feels less painful to delay payment. This demonstrates how powerful behavioral psychology is in driving financial decisions.
00:19:14
Because of this, advisors should discuss these programs with nearly all clients. You might be surprised by how many use them regularly without realizing the risks.
00:19:30
This is not the end of the story. It is likely just the beginning. It will be interesting to see how these programs evolve, how they affect the economy, and how they shape consumer behavior. The best step you can take is to start discussing the risks with clients now, before it becomes a bigger issue.
00:20:10
That wraps up this episode of the BIF Bites Podcast. I hope you found this look into short-term debt trends helpful, and I will see you in the next episode.
