Layaway in reverse
Just to ensure that we’re all on the same page let’s start with a quick definition of layaway. Layaway is the term used when a customer makes a deposit on a product and a store holds it, until the customer can pay off the remaining balance of the product. Once the product is paid for in full the customer can then have the product. This option started in the 1930’s during the Great Depression and significantly slowed down in the 1980’s with companies like Walmart completely ending the year round program in 2006. This program operated with little risk to the company, as they could simply put the item back on the shelf if the customer didn’t pay off the balance.
Now that we have a working definition and an understanding of layaway you may be wondering what is “Layaway in reverse.” Great question, layaway in reverse is the buy now, pay later option. The BNPL option allows you to receive the product prior to paying off the balance. In order to sign up for one of these companies most companies will do a soft or hard credit check before they allow you to split the cost of the product into four payments. The first payment is due at the point of sale and each payment is due every 2 weeks thereafter. Sounds great right? If you answered yes, 60% of the country agrees with you.
There are certainly several pros to the buy now, pay later option. The first obvious pro is that it allows you to receive your item without paying the whole price upfront. Typically they only require 25% of the purchase price to be paid upfront. Secondly, unlike credit cards, BNPL companies don’t charge interest. Thirdly, they don’t lower your credit score for using the service, whereas credit card companies adjust our score according to card utilization. BNPL only impacts your credit score if you don’t make the payments. While this all sounds perfect there are still some drawbacks to consider.
The danger of the BNPL option is that it allows consumers to overspend. Oftentimes people will use the BNPL option to pay for something that they can’t currently afford. This allows them to rack up a significant amount of debt and spend their paycheck before they even receive it. Remember the payments are deducted from your checking account every 2 weeks with the first payment due at the time of sale. This means that unlike credit cards, which allow you to pay off the debt over a long period of time, BNPL companies require that you have the product paid for within 6 weeks. Moreover, they give the false perception that the item cost less than what it actually cost as you’re only paying 25% upfront. In summary, the best financial move is to not use credit cards nor BNPL services and save until you can afford the item you want to purchase.