Have you noticed the new shopping system, which allows people to pay overtime? While the system might sound fantastic, because you simply grab an item and hit pay later, we must indicate that it also comes with its share of risks. The payment service is, in reality, a short and interest-free loan that has to be paid in equal instalments. Like other loans, therefore, there is a risk of getting deeper into debts if you default.
One of the questions people have been asking about "buy now, pay later" is, "can you use it without sinking into financial trouble?" Keep reading to see our six proven tips that can help you to use the service responsibly.
What is Buy Now Pay Later?
Many retail enterprises are getting creative to make their products more appealing and outdo competitors. Instead of relying on banks to make their products affordable and appealing, they are turning to fintech startups for more creative ways. Unlike the traditional hire purchase processes where the seller holds the product until it is paid for in full, “buy now, pay later” lets customers receive their products immediately and pay for them later.
In some cases, buyers only need to pay a small fraction of the price tag, while there are instances when no deposit is needed. You only need to place an order and get it delivered without paying anything. Then, the payment is made in equal instalments, which can be weekly or monthly.
When you get the products delivered, it means that you have gotten a loan that has to be paid in instalments. However, it is interest-free, and the only thing you need to pay is the actual price tag of the item. Therefore, if you buy an item worth $300, you only get to pay that amount.
Although the service looks attractive because of the easy-to-access credit, it comes with a darker side. First, the retailers take a huge risk by simply allowing buyers to get the products and pay at a later date. "What if they don't?" Concerns have been raised that people are getting tempted to purchase what they cannot afford.
The system works like credit cards for consumers, which implies failing to pay on time attracts penalties. Think of a person who places an order for multiple products and fails to pay for all of them. The penalties will rack up fast and pull him deeper into dents. It will also damage his credit score, implying that even getting credit from other financial institutions will be pretty difficult.
How to Use Buy Now Pay Later Responsibly
As we have highlighted, "buy now, pay later" can easily pull you down into the abyss of debt if you are not careful. However, it is an excellent service if you are responsible. Here are the six questions you need to ask to be able to use "buy now, pay later" responsibly.
Do You Really Need the Item You Want to Buy Now and Pay Later?
This should be the first question to run through your mind when thinking of using the service. To answer it, you need to come down and define needs versus wants. Your needs can be categorised into several classes:
- Your daily needs: These include things like utilities and children’s education.
- Seasonal needs: Good examples include a wedding and New Year gifts.
- Emergency needs: These are things such as broken appliances, medical bills, and urgent repairs.
Although wants are still important, it is important to prioritise basic needs. In the case of wants, it would be a good idea to consider saving towards them as opposed to using the “buy now, pay later” service. When you go the saving route, it comes with some great benefits:
- It helps to build a sense of patience in you, which is an important attribute of life.
- There is a great sense of fulfilment when you finally pay for the item.
- You are able to look deeper into your life and establish whether the item is really important in life.
- You are likely to come across a more affordable alternative. If an item costs $600, you might buy it for $300 from stores offering clearance sales.
Can You Afford the Item?
Once you decide it is important to have the item of interest, go to the next step and answer the question, “Can you afford it?” The truth about life is that there are so many alternatives, some expensive and others less expensive. Take the example of a car. Perhaps you have seen that latest model on the road and want to have it right away, but can you afford it?
How do you decide that you can afford an item? If you can buy the item in cash and still be left with money for all other items on your budget, it means it is affordable. If the cost is high, you might want to go for an instalment plan, which involves splitting the cost of the item to purchase it. This means that only a small amount of your monthly income will go into paying for the item.
However, if you are unable to pay it in cash and the monthly instalment would still strain your budget, this implies that the item is not affordable. So, you better consider an alternative. When budgeting for your income, the needs should take about 50%, wants 30% and savings 20%. If the wants, call them luxury, start eating into the savings and needs, consider that as a serious red flag and reverse the trend immediately.
When you purchase an item that you cannot afford through the “buy now, pay later” service, there is a risk of defaulting payments, which will attract a lot of penalties. This means that you will end up paying more than the item is worth. Why pay $500 for a smart TV when its actual price tag is only $350.
Is There an Alternative?
If you establish that your broken TV needs to be replaced, but the latest model is costly, the next question should be, "Is there an alternative?" The alternatives available on the market might not be as sleek and attractive as the new ones, but they get the job done and might fall within the amount you can afford.
You might also consider buying a used item instead of going for the new and more expensive models. In some cases, people use the term used to denote poor quality products, but this is not true. You can get an item that has just been used for a few weeks or months, but the seller wants to move and opted to sell it. However, it is prudent to carefully check the item to ensure it is in good condition.
With used items, you can get almost everything, from cars to clothing and home appliances. If you are smart, you might actually want to check what used items alternatives are available before pressing the buy button for an item on the "buy now, pay later" service.
Will the Item Tip My Monthly Budget?
If you ask most people in Singapore, their budgets are pretty tight because of a long list of payments, such as mortgages and insurance. Therefore, you need to closely look at the budget and think of how the new item will impact it. For example, if your refrigerator broke down and you need another, does the budget have room for it?
If it has, you can place an order, but here is what you can do if it doesn't. Relook at the budget and see if there are other items that can be trimmed or dropped. For example, if you go for a holiday to a different city every weekend, consider reducing that to once every month and directing the money to pay for the new item. You might also want to service the product and continue using it.
The good thing about the “buy now, pay later” services is that the products are interest-free. So, consider using it if you can afford and stick to the agreed payment timelines. You are simply paying the actual price of the item but in several instalments.
Are There Other Instalment Payments on Your Budget?
Look, just because it is possible to reduce the cost of the item to something like $40/ month does not imply it has to be added to your paying list. Here, you need to think about the other payments that need to come from your revenue. For example, if you have a total of nine $40 instalments to make every month, it implies that a total of $360 will get deducted. So, look at the new item from the broader angle of the entire payment.
Will You Get a Reward for It?
If you take a closer look at most zero interest purchases, they rarely come with perks, but things are different when it comes to the "buy now, pay later" services. The highly competitive retail industry has made the retailers make their deals sweeter by throwing in rewards for clients. So, check closely to identify and only work with the retailers who also provide additional benefits, such as reward points.
How Do You Use “Buy Now, Pay Later” Service?
Once you decide it is okay to buy an item using the "buy now, pay later" service, how do you go about it? You need to start by checking the available retailers offering "buy now, pay later" services and visit their websites. Most of them have listed different conditions, and you need to fulfil them. Here are some of the common requirements:
- Age of 21 years or older
- Member / account with the service
- An accepted method of payment, such as a credit card
If you are eligible, that is all. You can start using the "buy now, pay later" service right away. Remember to always buy responsibly. If you do not qualify to use the service, there is always a different route of borrowing a personal loan.