\n<\/p>\n
\u201cBuy now, pay later\u201d<\/strong> companies have been around for decades, but not in the form they take today. You may have noticed that when you check out from an online store, a little prompt asks you if you want to purchase your goods for just \u201cfour easy payments<\/strong> of\u2026\u201d It seems like a good deal, doesn\u2019t it? You can buy the same goods, for less, today, with no interest payments! Before you add those shoes to your cart, think twice before selecting the \u201cbuy now, pay later\u201d option.<\/p>\n Alexi Horowitz-Ghazi<\/strong><\/a>, NPR reporter<\/strong> and host of Planet Money<\/em><\/strong>, was interested in how this type of interest-free internet shopping<\/strong> is affecting consumers. Through his research, he found numerous examples of online shoppers overspending, getting into debt, and not knowing their total purchase price. The ease of paying just a fourth of a product\u2019s price and getting it delivered in days became too much for many consumers to resist. And now, they\u2019re paying the price.<\/p>\n If you don\u2019t want to fall prey to this type of split-up pricing, you\u2019ll want to hear what Alexi, David, and Mindy have to say. Using this type of \u201cinterest-free\u201d credit could put your <\/strong>financial freedom<\/strong><\/a> in jeopardy<\/strong>\u2014and no one wants to trade early retirement<\/a> for a new swimsuit.<\/p>\n Mindy: Alexi: Mindy: David: Mindy: David: Mindy: David: Mindy: David: Mindy: David: Mindy: David: Mindy: Alexi: Mindy: Alexi: Mindy: David: Alexi: Mindy: Mindy: Alexi: Alexi: David: Alexi: Alexi: Mindy: Mindy: Alexi: Alexi: Alexi: Alexi: Alexi: David: Alexi: Mindy: Mindy: Mindy: Alexi: Alexi: Alexi: Alexi: David: Alexi: David: Alexi: Alexi: Alexi: David: David: Alexi: David: Mindy: Alexi: Mindy: Mindy: Mindy: Mindy: Alexi: Mindy: Alexi: Mindy: Alexi: Mindy: Alexi: Mindy: Alexi: David: Mindy: David: Mindy: David: Alexi: Mindy: David: Mindy: David: Alexi: Mindy: Alexi: Mindy: Alexi: Mindy: Alexi: Alexi: Mindy: David: Mindy: Alexi: Mindy: David: David: Mindy: David: Mindy: \u00a0<\/p>\n<\/div>\n Help us reach new listeners on iTunes<\/a>\u00a0by leaving us a rating and review! It takes just 30 seconds.\u00a0Thanks! We really appreciate it!<\/p>\n Interested in learning more about today\u2019s sponsors or becoming a BiggerPockets partner yourself? Check out our\u00a0<\/i>sponsor page<\/a><\/i>!<\/i><\/p>\n
Welcome to the BiggerPockets Money Podcast show number 312, Finance Friday edition, where we talked to Alexi Horowitz-Ghazi about the buy now, pay leader program.<\/p>\n
In the early years of credit cards that led to problems with overconsumption and spending, problems with fraud, that then led to the regulatory framework that now is just kind of normal to us. And so this feels like a new type of consumer technology that\u2019s also started with individual businesses targeting individual demographics and is now expanding. And now the traditional financial institutions are like, \u201cAll right, we\u2019re going to start offering versions of this to compete.\u201d But there hasn\u2019t been a full regulatory reckoning. So we\u2019re still in that leading edge moment of kind of new technology.<\/p>\n
Hello, hello, hello. My name is Mindy Jensen and joining me today is my military millionaire cohost David Pere.<\/p>\n
What\u2019s up? I know, I\u2019m supposed to say something super profound.<\/p>\n
That\u2019s okay, you don\u2019t have to.<\/p>\n
The sky is blue, because science.<\/p>\n
Wow. That\u2019s not why the sky is blue at all. David and I are here to make financial independence less scary, less just for somebody else. To introduce you to every money story, even the ones that I don\u2019t love. Because we truly believe financial freedom is attainable for everyone, no matter when or where you are starting.<\/p>\n
Yeah, whether you want to retire early and travel the world, or go on to make big time investments in assets like real estate or start your own business, we\u2019ll help you reach your financial goals, get money out of the way so that you can launch yourself towards your dreams.<\/p>\n
David, today, we are speaking to Alexi Horowitz-Ghazi from the NPR podcast, Planet Money. He recently released an episode about the buy now, pay later program, which is also called the point-of-sale loan program. And holy cannoli, I\u2019m going to give you a spoiler right now. I don\u2019t like this program. And I want to talk to Alexi about it because I think he\u2019s got a lot of great insights into this concept and he was the first person to introduce me to this particular idea. I didn\u2019t even know it existed until I listened to his episode. And I was like, \u201cWhoa. That sounds like trouble.\u201d<\/p>\n
Yeah, it definitely feels like it\u2019s targeting people who are\u2026 I want to say, less well off. But it\u2019s not something that billionaires are running around using. I feel like it\u2019s targeting people who are a little bit less financially educated and they see it, psychologically, as an easy way to purchase something that they want. And it seems like it would be very easy to fall into the trap of doing this too much, and then being just completely overwhelmed.<\/p>\n
The exact problem that the heroine of Alexi\u2019s story, that released on his podcast, fell into. She discovered that she could buy this item and it wasn\u2019t this giant price. It was this small price a bunch of times. And she\u2019s like, \u201cOh. Well, that\u2019s practically nothing. It felt like monopoly money.\u201d So then she goes and does it again, and again, and again. And at the end of the month, she\u2019s like, \u201cOh, I\u2019ve made a big mistake.\u201d What is that quote from Arrested Development? \u201cI\u2019ve made a huge mistake.\u201d So it feels like people who use the buy now, pay later program are going to be quoting Joe Bluth a lot.<\/p>\n
Hopefully not, but.<\/p>\n
Please tell me that you got that.<\/p>\n
Of course.<\/p>\n
Alexi Horowitz-Ghazi is a host and reporter for NPR\u2019s Planet Money and is drawn to tales of unintended consequences. He recently released an episode about the buy now, pay later companies, which are also known as point-of-sale loans. This is a special episode of Finance Friday because I think this is a crisis in the making. And people who are using the service aren\u2019t educated on the downsides. Alexi, welcome to the BiggerPockets Money Podcast. I\u2019m so excited to talk to you about this.<\/p>\n
Hi, Mindy. Hi, David. Thank you for having me. It\u2019s a pleasure to be here.<\/p>\n
I want to thank you for bringing up this topic. Because until I listened to your episode, I had no idea that this thing even existed. I am definitely not the target market for the buy now, pay later companies. So let\u2019s just give an overview about this again. What is the buy now, pay later program?<\/p>\n
Okay. So buy now, pay later is a relatively new kind of consumer credit. They\u2019re basically installment loans that are offered to consumers at the point-of-sale. So at the checkout, if you\u2019re buying clothes, or an increasing number of things, airline tickets, even like gas and IRL. It started out as an internet phenomenon, but it\u2019s growing to more and more parts of the economy, including at the real life checkout.<\/p>\n
Oh. Oh, that\u2019s even worse.<\/p>\n
Yeah, that\u2019s very interesting. I can\u2019t imagine the idea of like, \u201cOh, I can\u2019t afford gas. So let me stretch the payment out for three months.\u201d<\/p>\n
Yeah, yeah. It\u2019s grown to all sorts of different services and products that you can buy. Initially, these companies were relatively narrowly targeted at retail sites for people who either had thin credit histories or bad credit, or otherwise couldn\u2019t gain access to other forms of consumer credit potentially. And so it was pitched as a democratizing way to get people the money they needed now and give them this new way of paying it back later. Generally, the way that works is they\u2019ll front you the money for whatever you\u2019re buying, and then you pay it back in four interest-free installments through whatever their platform is, depending on what the company is. There are other types of loans. There are longer loans with different kind of terms and conditions. But that\u2019s the basic model, is paying for interest-free payments.<\/p>\n
Okay. In your episode, you spoke with Amelia who started down the buy now, pay later path by buying a brown and white tie-dye bikini. And I can see this in my head, \u201cOh, that\u2019s so cute.\u201d But it was a $200 bikini, which makes my frugal heart break. She noticed, when she went to check out, that there was this buy now, pay later option and she clicked it. And she now had the option of paying in four installments of $41.99. And she\u2019s like, \u201cWell, I can do that. I can get $41.99. It\u2019s no big deal.\u201d And I instantly thought of layaway. Alexi, I\u2019m not sure how old you are but I\u2019m very old. And we had layaway. We didn\u2019t have this fancy internet thing when I was growing up, we had layaway. But we didn\u2019t get the items with layaway. You go to the store. You give them all the things you want in the special layaway department, and they put it away for you and you make payments.<\/p>\n
I remember I bought a pair of peach overalls that were very hot in 1987 on layaway. And it took me\u2026 I had to drive to the store every week for four or five weeks to write out a check or pay cash $20 a week for this. But now, it\u2019s this easy click and it\u2019s not as real. I mean online purchases already don\u2019t seem real because it\u2019s just\u2026 My credit card is already in the system. All I have to do is put my fingerprint on my little fingerprint sensor on my keyboard, and now I just made a payment. That\u2019s even less real than having to type in my credit card number at the site. Like it\u2019s so easy to make a payment now. And now I don\u2019t even have to pay the whole amount. I can pay it in four easy installments. This just seems like\u2026 This is where to me the crisis is in the making. Because this isn\u2019t regulated, right?<\/p>\n
It does. These services kind of fall into a few different regulatory schemes, depending on whether they are run by banks. And regular credit card companies have basically been responding to this new wave of buy now, pay later services which started taking customers from them, taking credit card transaction money from them. And they responded and said, \u201cWe can\u2019t leave all of this money on the table, leave this whole consumer group without an option from us if they\u2019re going out and spending money this way.\u201d Ones that are run by banks fall under a different set of regulatory laws. The kind of distinct buy now, pay later companies interact in various ways with credit card regulatory systems.<\/p>\n
But it\u2019s still not clear which of those they\u2019re meeting. And so there\u2019s now been this wave of calls for at least investigation from regulators. So the Consumer Financial Protection Bureau started an inquiry last year into how these companies fit into the existing regulatory structures. If there are any rules that they aren\u2019t meeting, if there are new rules that need to be devised to make them safer for consumers. And the House Financial Services Committee also held a hearing on this question last year, last fall, I believe, looking into that question. So it\u2019s still a bit opaque, honestly, what regulations do or don\u2019t apply to them in which they\u2019re hitting, which is part of the reason that this is of concern to a lot of consumer advocates.<\/p>\n
Yeah, absolutely. Is there any data as far as how this is impacting different people from different economic backgrounds?<\/p>\n
As far as I\u2019ve seen, I don\u2019t have a kind of demographic breakdown. Definitely the pitch to businesses as to why they should accept this type of payment type is because they\u2019ve seen a large adoption by millennials and zoomer consumers. Millennials, for a while, there were kind of seen as less interested, a little more reluctant to use traditional consumer credit products like credit cards. People raise in the wake of the financial crisis, and so this was pitched as an alternative that doesn\u2019t quite a way to get credit, that doesn\u2019t quite interact with the existing credit system.<\/p>\n
So you don\u2019t need necessarily very high credit scores to get access to these services. And whatever you do on them for the most part up until now, whatever loans you\u2019re taking out at the point-of-sale are not being reported to credit bureaus. It\u2019s not designed to impact or relate to your credit score. So it\u2019s like credit without the baggage of the current credit system is how it\u2019s pitched. And so the initial uptake in these products were amongst those demographics, but that\u2019s expanded as they\u2019ve gone mainstream in places like Walmart and Target. And a lot of major airlines are now offering these buy now, pay later payment systems at checkout.<\/p>\n
Is there anything predatory or detrimental about this practice? I mean, to me, I am\u2026 I don\u2019t know if you could tell, but I\u2019m not a fan. I think this plan, this program is\u2026 I\u2019m the host of the BiggerPockets Money Podcast. I have my financial stuff together. I can see that a 0% interest loan would be awesome. Why would I pay now when I could pay later and it doesn\u2019t cost me anything? But I\u2019m also responsible with my credit. I can see that this would be really awful for somebody who doesn\u2019t understand the negative consequences of their misactions.<\/p>\n
I, in the past, have missed a credit card payment. I remember missing one credit card payment because the statement didn\u2019t come. I\u2019m really old. This was back when we didn\u2019t have the internet and they would just send it to you in the mail, and things would get lost in the mail. And I remember six years later I was getting a mortgage and the mortgage person was like, \u201cWell, what about this missed payment?\u201d I\u2019m like, \u201cWhat are you talking about? I never miss a payment.\u201d But there are people who don\u2019t understand how this affects you. And you mentioned that it\u2019s not necessarily set up with the credit system, but they are reporting the negatives. When you miss a payment, that\u2019s being reported in many cases. You\u2019re just not being reported when you\u2019re making the payments. So in that regard, it kind of seems predatory on people who don\u2019t know what they\u2019re doing. I don\u2019t know how to phrase that.<\/p>\n
I think it\u2019s a hugely mixed bag at this point. I think consumer credit technologies, including credit cards are in part\u2026 The point is that it enables people to spend money. The problem comes when people are spending too much money, or get into cycles of spending and revolving debt that make it impossible to dig themselves out of. That\u2019s been true of credit cards and other forms of consumer credit, as much as it is of buy now, pay later. Of course, with credit cards, that stuff happened in the \u201950s and \u201960s and in the \u201970s. A whole series of consumer protection laws were passed that has curtailed some of the outrageous spending and fraud that came about in the wake of credit cards being this new technology for people to buy whatever they want, with the idea that they would pay for it later.<\/p>\n
So it\u2019s kind of a similar thing, we\u2019re in an earlier stage of this technology and we\u2019re watching it play out. In terms of the credit reporting, it is true that for the most part, the way a credit bureau would hear about what you\u2019ve been doing using buy now, pay later services would be if you have been unable to meet multiple payments and then defaulted on your payments. So some of those are sent to credit bureaus. So it is easier for there to be a negative effect from these products on your credit score than for there to be any sort of positive. There\u2019s at least one buy now, pay later company that is kind of\u2026 To differentiate themselves, they\u2019re offering a way to report your positive payments, making your payments on time to the credit bureau. So there definitely is like a niche in this space to do that.<\/p>\n
In terms of the predatoriness or not, it\u2019s hard to make a call about that. There are particular parts of the design that worry consumer advocates. Our protagonist in our story, as an example of this. Part of the pitch from buy now, pay later companies to merchants when they\u2019re saying, \u201cUse our payment service,\u201d is that it causes this kind of psychological trick by making the purchase price of something look a bit lower or feel a little bit lower when you kind of\u2026 It\u2019s something that you see in late, late night infomercials, or whatever. Like, \u201cFour payments of 19.99.\u201d There\u2019s something about seeing a lower ticket, even though it\u2019s attached to installment payments and it\u2019ll be following you in the future, that makes it feel a little bit cheaper or at least you\u2019re not depleting all of your income right in the moment. And so you feel like you can make those payments as they come up.<\/p>\n
One of the big problems that people point to is that because this isn\u2019t being reported systematically to the credit bureaus, and these individual buy now, pay later companies are not telling each other about your loans with them. There\u2019s no communication here. You could take out a buy now, pay later loan from four or five different companies. And all of a sudden you\u2019re keeping track of four or five different individual payments. Or maybe if you did multiple purchases with each of those, it can kind of turn into this very confusing rotation of various payments that are coming in at different times. And there\u2019s no credit scoring net that\u2019s going to keep you from spending more and more.<\/p>\n
There is a kind of internal system within each of the companies that presumably limits the amount that you\u2019re spending. When you apply to buy something through buy now, pay later, generally, they\u2019ll often run a soft credit check. So they\u2019ll look and see what your credit history is. But a soft credit check means that it won\u2019t impact your credit score. Then they have different kind of algorithms that they use to also determine whether they should give you a loan. And then they\u2019ll set a kind of initial spending limit. So they\u2019ll say like, \u201cYou can only spend $200 with us.\u201d And once you have proven yourself through that purchase to be dependable by making three or four of your installment payments, they\u2019ll up your limit. So there\u2019s kind of like an internal credit system within each of the companies. But because they don\u2019t communicate, you can easily get into trouble if you\u2019re going on a shopping spree like our character did.<\/p>\n
It\u2019s like the exact opposite of asymmetric returns. It\u2019s like you\u2019re investing and you\u2019re like, \u201cOh. I might lose 10% on this, but my upside is up to 200%. So that\u2019s a win.\u201d This is like the exact opposite, where it\u2019s like, \u201cHey, they don\u2019t report anything if I\u2019m doing great. But if I mess anything up, it\u2019s going to bite me.\u201d So there\u2019s not an upside for your credit score, but there\u2019s definitely a downside.<\/p>\n
Yeah. I will also say, generally, it doesn\u2019t seem like the kind of standard model is based around nailing you on late fees or getting you into a fee trap structure from what I found and from what researchers I saw found. The main thing about this business model, and this may shift as more and more companies take it up and the larger economics change. But right now, they\u2019re able to do this because they\u2019re convincing enough people to buy more stuff and it actually makes sense for merchants to pay higher fees to adopt these services, to offer these services.<\/p>\n
That was going to lead into my next\u2026 Or that does lead into my next question. The consumer, when they\u2019re using this program correctly, essentially gets an interest-free loan. But in your episode, you mentioned that it costs the retailer 4 to 9%, which is almost double the going rate of credit card charges, which sounds like it would be a negative program all around. But the result when the consumer is spending less in their monthly payment, is that they\u2019re buying more, they\u2019re spending more overall. So the hero of your story is Amelia. She bought a $200 bikini, but it was really only $41. And then the next day she went out shopping again and she bought sneakers and jeans and sweatpants, and her total bill was going to be like $20 or something. And she\u2019s like, \u201cWell, that\u2019s practically free.\u201d \u201cIt feels like monopoly money,\u201d I think is the quote that I got from her.<\/p>\n
One time is, okay, no big deal. Let\u2019s say she used this and paid $200 for a bikini and made her four payments, and then she was done. And this was like the bikini of her dreams and whatever. I don\u2019t want to say no big deal. I don\u2019t want to say understandable. But that\u2019s not a financial detriment. I think in the story you even asked her, \u201cDid you learn your lesson?\u201d And she\u2019s like, \u201cI still spend. I still buy stuff online.\u201d And I think that it\u2019s going to be\u2026 We\u2019re talking about people who aren\u2019t my age. We\u2019re talking about people who have grown up with the internet. They grew up with your life being online all the time. When I was growing up, the phrase was \u201cKeeping up with the Joneses\u201d. That\u2019s just a phrase. But we have a TV show called Keeping up with the Kardashians, and you see their big, beautiful, glamorous life where they have all this amazing stuff. And you\u2019re like, \u201cWow, they must be happy because they have all this stuff.\u201d So if I have all this stuff, then I\u2019ll be happy too.<\/p>\n
And spoiler alert, they have problems just like everybody else. Money doesn\u2019t buy happiness. But when you\u2019re 19 or 25 and you\u2019ve been living in COVID for two years, and you\u2019re not going anywhere, seeing anything. And all you see is this fake life that people are showing you online, you can think, \u201cOh, well, if I just had that brown and white bikini, then my life would be perfect.\u201d You\u2019re not going to be happy when you have a brown and white bikini, because that\u2019s not the thing that\u2019s missing from your life. So don\u2019t go out there and\u2026 I\u2019m not a reporter. I am definitely biased. And I hate this program so much because I just think it\u2019s awful for people who don\u2019t know what they\u2019re doing, and that\u2019s exactly who they\u2019re aiming at. I asked you kind of a leading question, \u201cIs there anything predatory or detrimental about this practice? Is there anything not predatory or good about this practice?\u201d<\/p>\n
Well, I was going to just say on the first point, one of the things that feels a little bit dastardly is the way that these have been so seamlessly interwoven with different kind of social media and influencer culture in a way. Our protagonist Amelia found out about this because a lot of the influencers who she follows and aspires to become, were plugging this new technology from a few different companies in their videos. They would do these haul videos, which are when they try on a bunch of different outfits, they order a bunch of different clothes, tell you which ones they like, how they fit. These kind of shopping videos essentially and then they provide a list of where you can buy the things. And now they offer this new payment system there, which was a big part of the strategy of targeting people in this demographic.<\/p>\n
So there definitely is something to be said for like this is targeted for people who generally don\u2019t have a high degree of financial literacy. And so there is like an even higher potential for problems there. That said, I think it\u2019s not\u2026 As far as I can tell, there is definitely promise here, right? If you\u2019re somebody who doesn\u2019t have access to other forms of credit and you use these things according to their terms and conditions, there\u2019s a way that you can use this to smooth your consumption in a way. Instead of using payday loans and taking on extremely high interest rates that get you into a debt cycle to make a purchase when you\u2019re waiting for your check to come in. If this is an alternative to that, it is pretty promising. In that like you\u2019re going to buy one thing, if you follow the terms and conditions, you can pay for it, and you\u2019ll get the money later down the line and be able to make the purchase even though you didn\u2019t have the immediate amount to spend.<\/p>\n
So as an alternative to other forms of consumer credit, I think there is definitely a promise here. There\u2019s going to be a trade off when it is integrated into the existing consumer credit scoring system I think. Because the way it\u2019s designed right now, if you were just to straight up report these types of purchases to a credit bureau, there are all sorts of things that would make it problematic. Because each time you\u2019re making a purchase with a buy now, pay later service, you\u2019re essentially taking out a new little loan, and you\u2019re taking out the maximum you possibly could take out on that line of credit. So what that would look like on a credit reporter to a credit bureau is like a ton of new loans all the time that are maxed out.<\/p>\n
There\u2019s maybe a benefit if you\u2019re paying them off consistently. But basically, the credit bureaus need to figure out a way to actually make sense of this data and make it so it\u2019s not like entirely detrimental immediately if it\u2019s reported to them. And as far as I can tell, that sort of stuff is in motion. This kind of movement of the broader financial system to try to make sense of this new product. But yeah, my takeaway was there are definitely a ton of pitfalls. There are easy ways to get into trouble with this, as there were with credit cards, as there still are with credit cards, if you\u2019re just deciding to charge everything and don\u2019t have the means to pay it back. With credit cards, you\u2019re paying interest. It will negatively affect your credit score as well, which will impact your ability to get a car, or get a house, or whatever else. So there are other consequences to going on this type of spending spree with other forms of consumer credit as well.<\/p>\n
But you get points.<\/p>\n
That\u2019s true.<\/p>\n
Okay. So we mentioned if you miss a payment, then it\u2019ll get reported and it can hurt your credit. But is there any other kind of recourse, like let\u2019s say I bought myself a $200 brown bikini, because why not? And I made the first 41.99 payment and then I didn\u2019t make another payment. But I already got the bikini and I look wonderful in it. So who eats\u2026 I mean, I can\u2019t imagine that the company calls and says, \u201cHey, please send that back.\u201d I wonder what\u2019s the recourse look like? Does the merchant eat it? Does the buy now, pay later company eat it? Like someone\u2019s getting hosed in that scenario.<\/p>\n
Yeah. So one of the appeals to merchants also of the buy now, pay later service pitch is that they\u2019re essentially being bought out at the moment that the customer buys the bikini. They are out. If the person had used a credit card instead, the consumer would have chargeback protections and other consumer protections that come specifically with credit cards because of some of the regulations that were put in place in the \u201970s, which means that if they didn\u2019t like it, they could initiate a charge back and that money would be pulled back from the merchants. So there are kind of financial risks to the merchants and annoyances that come with credit cards and some other payment things that make buy now, pay later a little more attractive.<\/p>\n
Well, basically we spoke to a few of our listeners. We did a wide call out. We talked to people on TikTok about their experiences with this. From the people that we spoke to, it seemed like if they missed a payment for organizational reasons, like they just\u2026 First of all, most of these payments are automatic. So you put in either a bank account number or a debit card number or a checking number, and they auto draw every two weeks or whatever the kind of payment cycle terms are. So generally, it\u2019s not like, \u201cOh, it slipped my mind.\u201d Is not the reason you\u2019re going to miss a payment. If you don\u2019t have funds in your bank account, from the folks we talked to, it seemed like the\u2026 Also, a lot of these services will send you payment reminders the week of, through text and other forms. And then if you\u2019re unable to pay, a few of the people we spoke to said, they set a new deadline basically.<\/p>\n
And they said, \u201cAll right. You missed this payment, we\u2019re going to charge you a late fee unless you can pay within\u2026\u201d I don\u2019t remember what it was, maybe seven days, or 10 days, or something like that. \u201cIf you do that, we\u2019ll waive the fee.\u201d So they\u2019re not even necessarily charging the fee at the first time the payment has dropped. Because their model is not really about getting you into a cycle of fees. They want you to be consuming more to be boosting the merchant number so the merchants keep paying the fees. So that\u2019s not really the predatory angle of the model, as far as I can tell. But there is a point at which they will send your payments to collections and potentially sell the debt. So these companies are on the hook as far as I can tell if it were really dropped, and then they can go through the traditional kind of trying to recoup their costs methods which would be collections, which is how it would potentially impact your credit score.<\/p>\n
Cool. I mean realistically though. I\u2019m torn on this. I like the way that their business model is charging the merchant for the service rather than the consumer. And there\u2019s not an interest rate and there\u2019s not\u2026 It\u2019s essentially the same as swiping your debit card. It\u2019s the same cost, just spread out. And so in some ways, I could see it makes sense. The downside I see is, like we talked about before the show, it\u2019s a tool. And if you, realistically, from basic personal finance stuff, if you can\u2019t afford to buy the item right now, then you probably should just wait to buy it rather than doing this. Because what\u2019s going to happen is you do five or 10 of these things and then for the next quarter, you\u2019re monthly expenses have shot up. And if something comes up, now you\u2019re kind of\u2026<\/p>\n
That kind of brings up a weird situation, which is\u2026 Let\u2019s say I got crazy and I bought $1,000 a month worth of bikinis. And so now I\u2019m on the hook for $1,000 a month for the next quarter, and then it\u2019ll go away, whatever. But if I\u2019m applying for a mortgage, that\u2019s not going to show on my credit report. So it won\u2019t show on my debt to income. So they may be like, \u201cOh yeah, totally qualified for the mortgage.\u201d And then I can\u2019t afford the mortgage. So it\u2019s kind of weird\u2026 Exactly like what you were saying. It\u2019s because it\u2019s not regulated and they don\u2019t really haven\u2019t figured out what to do with it that it\u2019s like there\u2019s some weird ways to fall through the cracks on this that could help you in some regard. But if you overdo it, next thing you know you\u2019re not even living paycheck to paycheck. You\u2019re like, \u201coh my gosh. I need this next paycheck so that I can pay all this back to zero,\u201d which is just not a fun spot to be.<\/p>\n
As you say, it\u2019s a tool. It is a tool designed to get people to consume more than they would otherwise. And a big part of the appeal is that they\u2019ve targeted this demographic of people who might not have been buying stuff on credit before at all. So it\u2019s a tool, but it\u2019s a tool that preys on people\u2019s desire to consume things, which is maybe a broader problem in society and with credit as a larger engine for our economy, but.<\/p>\n
It\u2019s the same psychological tool as why on Sunday, when I was in Walmart getting a toy for my five year old, as we\u2019re doing grocery shopping. And you\u2019ve got, whatever. I don\u2019t know, $10. We\u2019ll say 15. And he points at something and he goes, \u201cOh, well, that one\u2019s only 14. So can I get something that\u2019s a dollar?\u201d And it\u2019s like, \u201cWell, that\u2019s 14.99.\u201d And that\u2019s a psychological game. So it\u2019s the same thing as like a course being 197 instead of $200. And the funny thing is, that stuff works.<\/p>\n
That works on me. That works on you. That works on all of us. I bet it works on Alexi too. Alexi, I don\u2019t want to speak for you but I bet it works on you too. Because you see the one, you don\u2019t see the 97. You don\u2019t round up. You see one.<\/p>\n
Yeah.<\/p>\n
With one, you round down. It\u2019s practically free because it\u2019s only one. You round a zero. And I\u2019ve used things like this. I do a lot of home improvements. And I go to Home Depot, I swipe my card. And if you use the Home Depot Credit Card and you spend X amount of dollars, you get no interest 4, 6, 12, 18, or 24 months. And I make sure that I pay that off before the end of the promotional period. Because if I don\u2019t, then I owe the entire amount of interest on the entire purchase for the entire time even if I only have $5 left at the end of the thing. So I make sure that I definitely pay that off before it\u2019s due.<\/p>\n
But that\u2019s an interest-free loan. I would much rather spend $2,000 over the course of 24 months than right now, because I can then go spend $2,000 at Lowe\u2019s as well and buy more stuff. So I can identify with what they\u2019re doing, but also I can afford to buy the 2000. I\u2019m just choosing the interest-free loan. And I think that\u2019s kind of the difference between the way that I\u2019m using it, which is in a more responsible way than this. This girl, I don\u2019t believe could have afforded the $200 bikini. Or maybe she could have paid $200 for the bikini, but then if she had to, she would not have also bought the shoes and the jeans and the sweatpants and all of the other things. It\u2019s set up and in that way I think it is very predatory. You\u2019re tricking people into paying later these little tiny amounts.<\/p>\n
I found an article on sfgate.com about this same concept. Because like I said, until I listened to your episode, I didn\u2019t even know this thing existed. This Celesta from the Bay Area, she\u2019s a fashion influencer on TikTok, said people almost like brag or joke, \u201cOh, it was only 24 payments of $20.\u201d Or, \u201cI got it with Afterpay so it\u2019s technically free.\u201d No, it\u2019s not free. Even if you\u2019re paying $1 for 47 payments, that\u2019s still $1 for 47 payments. It\u2019s only free if it costs you $0 forever. And it doesn\u2019t cost you $0 forever.<\/p>\n
I wanted to do this episode and talk to you more about this because I think there\u2019s a lot of people out there who have no idea that this program even exists. And I can see a lot of people who\u2026 Because they don\u2019t know what exists, they don\u2019t talk to their children about it. I would have not talked to my children about this because I didn\u2019t know that existed until very recently. And now this is another thing I have to teach my kids not to do, unless they can use it in the way that it will benefit them. And that is to buy things that you were already going to buy and then just spread out the payments. But only if you do it all the way through. I just don\u2019t see a lot of upside for most people with this program.<\/p>\n
Yeah. The other thing to mention is that a lot of these companies now become kind of like marketplace platforms. So you can actually go shopping or they\u2019ll send you\u2026 You can go shopping through their platforms essentially. So it makes another kind of avenue, another app on your phone through which you can go and find deals and use their service.<\/p>\n
No.<\/p>\n
So that\u2019s another thing people should be aware of if they\u2019re thinking about downloading any of these apps. And that\u2019s also brings up one other thing. The CFPB is also looking into what type of data is being harvested from people\u2019s phones, and whether and how that\u2019s being sold and packaged. So that\u2019s not clear yet, but because it\u2019s such a kind of digital technology because it potentially interacts with other apps on your phone, like what is tracked is not exactly clear yet. So that\u2019s another thing regulators are concerned about and looking into.<\/p>\n
Well, and it\u2019s not all wine and roses for these companies right now. I noted that Klarna just announced that they\u2019re laying off 10% of their workforce, and a firm has lost nearly three quarters of its stock value since the beginning of the year. I mean we\u2019re recording this at the end of May where everybody\u2019s lost a ton of their stock value. So I can\u2019t really say that that\u2019s all due to this. But some of these companies are being sued in California saying that they\u2019re acting like lenders, so they should be registering as lenders and then being regulated as lenders. So I think there\u2019s a lot of\u2026 What is it? It\u2019s a learning time and an exploratory time to try and figure out. Because I think it\u2019s kind of funny that Silicon Valley moves so fast and then the stodgy lawmakers have to scramble and catch up. Do you remember when Mark Zuckerberg was in front of Congress and one of the Congress people was like, \u201cCan you tell me why my iPhone does this?\u201d And he was like, \u201cI don\u2019t work for iPhone.\u201d<\/p>\n
Those are my competitors there.<\/p>\n
Yeah. They don\u2019t understand what\u2019s going on. And because they don\u2019t understand what\u2019s going on, they don\u2019t know how to regulate it. And so it\u2019s this\u2026 I\u2019m so flustered, because I\u2019m so frustrated because we don\u2019t have financial education in school. My daughter is a freshman. Tomorrow\u2019s her last day of freshman year of high school. And with her entering class, her high school class is the first class in Colorado that is required to take financial education before she graduates. And she has to take a whopping half semester, and I\u2019m like, \u201cOh, well, don\u2019t put yourself out.\u201d I don\u2019t even know what they teach in this whopping half semester, which doesn\u2019t come until her junior year. And by that time, she could have already gotten herself into a whole bunch of debt with this stupid Klarna and the firm and Afterpay.<\/p>\n
There\u2019ll be four new buy now, pay later and other types of financial technologies we haven\u2019t heard of yet by the time.<\/p>\n
Exactly. Exactly. Okay. So the moral of this story is talk to your children about credit and how buy now, pay later, and all this online shopping, and all this craziness. Because you can get yourself into a world of financial hurt even when you think that it\u2019s monopoly money. \u201cI had no idea that I had to pay this, and it\u2019s technically free because it\u2019s only a dollar.\u201d It\u2019s not only anything unless it\u2019s only zero.<\/p>\n
Yeah, interest-free does not mean free.<\/p>\n
They should make a net worth requirement for teaching that financial class. Because it\u2019s kind of ironic that you know that whoever\u2019s teaching it probably they took a class in college and they may or may not actually know anything about finances. But at least they\u2019re trying, which is cool. You mentioned something, Mindy. I was trying to figure out how to word this. But the idea that they should be regulated as lenders is interesting when you consider that\u2026 Like they\u2019re not lending you funds, they\u2019re not charging you interest, and they\u2019re not charging you fees.<\/p>\n
Well, what about a mortgage? When I go and buy a house, the mortgage company doesn\u2019t hand me $500,000 and say, \u201cOkay, now go give that to the title company.\u201d They send it directly to the title company, who gives it to the person who pays off their mortgage. This is the same thing.<\/p>\n
That\u2019s true. They charge points in interest and fees. So it\u2019s like\u2026 Yeah-<\/p>\n
Still loaning you the money.<\/p>\n
\u2026 it\u2019s like this weird loophole that\u2019s just hanging out over here like, \u201cOh I hope no one sees us.\u201d Like, \u201cPlease don\u2019t regulate us Mr. CFPB.\u201d<\/p>\n
Yeah.<\/p>\n
Well, but they\u2019re point-of-sale loans. Buy now, pay later is a point-of-sale loan. And just because they\u2019re not charging interest, doesn\u2019t mean it\u2019s not a loan. They are giving somebody money on your behalf so that you can buy something that you don\u2019t have enough money to pay for outright, or that you\u2019re choosing not to pay for outright. So that\u2026<\/p>\n
You\u2019re right.<\/p>\n
Yes. Wow. Could you say that again? I didn\u2019t hear that.<\/p>\n
My mic suddenly stopped working. I don\u2019t know what\u2019s happening.<\/p>\n
Buy now, pay later is a way of describing any loan also. I mean whether you\u2019re buying the house now and paying for it later, or a car, or anything else, it\u2019s kind of baked into the concept.<\/p>\n
Yes, but this is\u2026 Now we\u2019re kind of splitting hairs, but I see what you\u2019re saying. Yes, credit cards are buy now, pay later in installments and I don\u2019t have to pay the whole thing all at once. But it\u2019s different.<\/p>\n
Yeah, it\u2019s revolving instead of installment basically. They both use fees. But credit cards depend on those interest payments as well to be profitable, whereas this just gets the money for the moment from a different place for the most part. Even though buy now, pay later companies do offer longer installment payments for interest. So they act a little bit closer to what a traditional credit card.<\/p>\n
I wonder how they would act if they were regulated like lenders are. If they had to follow all the same rules, would they change their tune? Would they change the way that they behave? I mean they would have to change the way that they behave. I wonder if they would still exist as many of them.<\/p>\n
Right. Well, the other thing we didn\u2019t mention too, is that it\u2019s actually even gone beyond personal finance consumer, or it\u2019s beyond consumerism or shopping or something. Now it\u2019s spread to, you can pay for some types of medical bills or dental bills or small business financing or home improvement. You could take out a kind of buy now pay later loan to do some of the work you were describing, going and doing yourself at Home Depot. So it\u2019s expanding to become a model for other types of act of commerce basically.<\/p>\n
I think it could have its place, but I think we need to enact more regulations around it. And I really am hesitant to say that because the government\u2019s really good at screwing things up. But I think that they need to do something so that there\u2019s more laws in place so that you have to follow all the same guidelines. So there\u2019s not just this loosey goosey, whatever.<\/p>\n
Yeah. Well, one last thing I\u2019ll say is that to me, it felt really reminiscent of kind of the way that credit card spread and were ultimately adopted and then regulated to some degree. Credit card started as, maybe in department stores or to particular business. You had credit within one business. And then eventually, a few of these networks came together to make cards that they could convince merchants across the economy to use and become interchangeable to make universal cards. And then there were all sorts of preposterous ways they tried to get people to use them.<\/p>\n
They mass gave out credit cards in people\u2019s mailboxes. And there was all sorts of ridiculous shenanigans in the early years of credit cards that led to problems with overconsumption and spending, problems with fraud, that then led to the regulatory framework that now is just kind of normal to us. And so this feels like a new type of consumer technology that\u2019s also started with individual businesses targeting individual demographics and is now expanding. And now the traditional financial institutions are like, \u201cAll right, we\u2019re going to start offering versions of this to compete.\u201d But there hasn\u2019t been a kind of full regulatory reckoning. So we\u2019re still in that leading edge moment of kind of new technology.<\/p>\n
Wow. Yeah, I think that\u2019s a really good point. That\u2019s a really good comparison that you\u2019re making. I can see the parallels. That\u2019s very interesting. Well, I\u2019m excited to see how this goes. I\u2019m excited to see some regulation coming, and I don\u2019t really think that that\u2019s going to come anytime soon. So if this is something you\u2019re planning on using, the buy now, pay later, just do it with extreme caution and read the fine print. Oh my goodness. Read the fine print of this thing that you\u2019re doing before you do it. Put it in the cart and then walk away and think about your purchase. Do you really need that brown bikini? David, you would look smashing it and it goes with your beard. But do you really need 20 of them?<\/p>\n
No, no, just two or three.<\/p>\n
Okay. Alexi, this was so much fun. I really appreciate your time today sharing your thoughts about this program with us. And I appreciate you bringing this up just in general because this episode was really, really, really helpful to keep me informed of all the new crazy financial shenanigans that Silicon Valley is coming up with. I can\u2019t wait to see what else they come up with.<\/p>\n
It\u2019s an exciting new world. Thank you guys so much for having me. It\u2019s been a pleasure.<\/p>\n
Okay. We\u2019ll talk to you soon. All right. David, that was Alexi Horowitz-Ghazi from NPR\u2019s Planet Money. I really enjoyed talking to him. But I do not like this program, this buy now, play later. I think there\u2019s a lot of potential upside where people could use it responsibly, but like credit cards, like other loans, people are going to use it negatively. And I just think that there\u2019s not enough regulation around it and it\u2019s targeting people who don\u2019t have enough education. But then even as I say that, I\u2019m thinking, \u201cWell, yeah. But what about credit cards? People get themselves into problems with credit cards. Why don\u2019t I have such a problem with credit cards or other types of loans?\u201d I don\u2019t know what it is about this particular program, maybe because it\u2019s in its infancy and there\u2019s no regulation around it. But I don\u2019t like this nearly as much as I\u2019m okay with credit cards and other things, because points.<\/p>\n
Yeah. The lack of regulation is definitely something to\u2026 I don\u2019t want to say worry about, but to be aware of. And then I think the other thing that got me on this, as far as just not being a fan, is the fact that if you use it, there\u2019s absolutely no upside to your credit or your credit history, or anything of the sort. But if you fail to make a payment, then there is a downside. It\u2019s the exact opposite of what you want as an investor. You want very minimal risk, massive upside potential.<\/p>\n
This is very little gain other than whatever item you want, and massive downside potential. Not to say that it\u2019s a terrible\u2026 I mean they\u2019re not charging fees, they\u2019re not charging points or interest. So there are worse options out there. But, I would say if you\u2019re looking at doing this, maybe the better bet is to just put that $45 away for four months and then buy it at once. And then you don\u2019t have to worry and run the risk of someone messing with your credit because of a missed payment, or whatever. And then hey, three months, four months down the road, if you still want it, then cool. Go buy it. And if you don\u2019t, then you\u2019ve got 200 bucks that you can now invest.<\/p>\n
What a great idea. Save for the purchase instead of making the purchase and scramble to make the payments later. I love it. That was a good point, David. Okay, should we get out of here?<\/p>\n
We should.<\/p>\n
From episode 312 of the BiggerPockets Money Podcast. He is David Pere and I am Mindy Jensen saying, \u201cTake care, polar bear.\u201d<\/p>\n