Buy Now, Pay Later (2 Cents Episode 8)

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Phrases such as "for just 4 easy payments of $19.99" were used to persuade us to purchase that gadget over the phone a decade ago. Today, with online shopping popularity on the rise, this tactic has taken new form, with companies such as Affirm, offering customers buy now, pay later (BNPL) options on various products.

In this podcast episode, Drew and Jeff offer up their 2 Cents on this new wave of online payments. How do these services work? What are the benefits and drawbacks of BNPL? Who uses these services? Learn the answer to these questions and more in this episode of 2 Cents!

AmeriServ's Website:
https://www.ameriserv.com/

Credits:
An AmeriServ Financial, Inc. Production 
Music by Rattlesnake and Millo
Hosted by Drew Thomas and Jeffrey Matevish

Thanks for listening! You can find out more about AmeriServ by visiting ameriserv.com. You can also find us on Facebook, Instagram, and Twitter.

DISCLAIMER
This podcast focuses on having valuable conversations on various topics related to banking and financial health. The podcast is grounded in having open conversations with professionals and experts, with the goal of helping to take some of the mystery out of financial and related topics; as learning about financial products and services can help you make more informed financial decisions. Please keep in mind that the information contained within this podcast, and any resources available for download from our website or other resources relating to Bank Chats is not intended, and should not be understood or interpreted to be, financial advice. The host, guests, and production staff of Bank Chats expressly recommend that you seek advice from a trusted financial professional before making financial decisions. The host of Bank Chats is not an attorney, accountant, or financial advisor, and the program is simply intended as one source of information. The podcast is not a substitute for a financial professional who is aware of the facts and circumstances of your individual situation. AmeriServ Presents: Bank Chats is produced and distributed by AmeriServ Financial, Incorporated.

Transcript

Drew and Jeff: 0:12

All right, so here we are, once again, back in the seats in front of our microphones for another episode of 2 Cents. And I am Drew Thomas, this is Jeff Matevish. And yeah, this is good stuff. I enjoy having these conversations with you, I really do. Because I think we find timely stuff. And then instead of just having the conversation between the two of us, we turn on the microphones and you get to listen in. It's a learning experience for us, too. Yeah, it is, it is a learning experience for us too. And I think that, you know, you get to be a fly on the wall, that's always nice, you know. So, the last time we got together, we talked about credit cards versus debit cards and the merits of both and things like that. And it got me thinking about who's using credit cards, and how often because I knew my parents were constantly preaching at me to not use credit cards, because they were so in debt with credit card debt, that they were just constantly telling me if you can't afford it, don't buy it. I don't know how things work for you.

Jeff Matevish: 1:05

Mine were like half and half. You had to build credit, so you know, you get a car loan or you know, a small personal loan. But you know, on the other half, it was the same thing, you know, if you can't afford it, you know, don't buy

Drew Thomas: 1:15

Yeah, and we've definitely talked about that,

Jeff Matevish: 1:16

Do you think that just because there's more it. too, where if you want to buy a car or a house or something at some point in your life, you need that credit, right, yeah, you have to have a credit history. And that means you got to so borrow money, build the credit and then stop. Yeah. Build it and then stop. Exactly. So, the article that I was reading, this is a, it's an article out of Financial Brand website, says Gen Z credit card use is outpacing Millennials amid financial stress and ballooning debt. So, we all know that lately, inflation has been high. Things are, you know, a lot more expensive than they were even pre-pandemic, whether it's lumber or food. Yeah, one of which you need more often than the other. But you know, Gen Z was one of those generations that said that they wanted their debit cards, they avoided credit, they, you know, they didn't want to get into that boat. However, Gen Z relationship to credit cards has changed according to research by TransUnion, as well as analysis of its extensive credit database. It says that the company compared Gen Z to millennials when they were in the same age range of about 22 to 24 years old, and adjusted dollar figures for credit use and income for inflation. And the research found that as of the end of 2023, which is believe it or not, almost a half a year ago. 84% of Gen Z-ers who are 22 to 24 years old, had general purpose bank card accounts, 23 percentage points more than the proportion of millennials at the end of 2023. So, all things considered Gen information about credit cards? Z-ers are actually using credit cards more at the same age of 20

Drew and Jeff: 2:48

Yeah, maybe. I don't know. I mean, but there's to 24 than Millennials were. good and bad information out there. I mean, people know that credit card debt can get yet. Yeah. But I think it just comes down to the fact that these are younger people with lower salaries generally, because they're just entering the workforce. And everything's so much more expensive. I think that it's possible that they might just feel like they don't have a choice but to use credit cards. Yeah. Live on borrowed money. Yeah, yeah. So, so we were looking at that, and then I started thinking, or we're restarted talking, about these buy now pay later things that are popping up all over the place now. So, you know, that's another thing that is relatively new to the marketplace, this idea that you can make equal payments. I know that when I'm on Amazon, just because everybody uses Amazon it seems, we keep picking on Amazon, but it's a good touch point that everybody recognizes. They partner with a company called Affirm. Yeah. And they offer a lot of times, this idea where you can, rather than paying the full price upfront, you can make equal payments. So, you looked into Affirm a little bit, right? I did, yeah. So, what did you

Jeff Matevish: 3:57

I mean, a good chunk of the products that learn? they're selling and that Affirm is being used on is 0% interest, but there are products that you know it, there is an interest component, component. Yeah. Okay. So, so it's, and that can be high and yeah, it can be from 10% to 36%.

Drew Thomas: 4:15

Okay, so yeah, so that that, that's potentially very high. Yeah. Yeah. So, okay, so let's, so let's look at this. So, a buy now pay later plan, essentially a short-term financing, allowing consumers to make purchases and pay for them over time. So, it's like, to me in my, in my old brain, it's like a reverse layaway. You know, back in the day, you went to KMart, and you put your stuff on layaway in August and you got it at Christmas after you paid it off. Okay, yeah. This is sort of the reverse, you get your product and then you pay it and equal payments over X amount of time. Yeah, yeah. And like you said, sometimes there's no interest, especially on the lower value items. There's, you know, so that that's an advantage. I mean, it's like a 0% interest payment. Yeah. And so do they charge fees or anything like that, like are there like hidden fees?

Jeff Matevish: 5:00

No, that was one of the big selling points, you know what you're going to pay each month at checkout pretty much. Okay, so yeah, no hidden fees, no late fees, but...

Drew Thomas: 5:11

Okay, so that mean, so that's nice. Yeah, I mean, I guess I'm assuming that, now, you say no late fees, but at the same time, if you don't make your payment, like what happens?

Jeff Matevish: 5:19

Then they can deny, you know, a future loan, so, and it's going to hurt your credit score, I guess.

Drew Thomas: 5:24

Yeah, I mean, these are technically loans. They are right. I mean, I was reading in one of the articles that essentially, there may be a soft pull of your credit when you go to sign up for one of these things. And they'll check the basics like, are you running late on your payments? Or do you have any, you know, missing payments, things like that, but they're not doing a hard pull of your credit, but with some of the more expensive items they may, at which point then your credit score could take a slight hit because you're getting a hard pull on your credit.

Jeff Matevish: 5:53

Yeah or through longer terms. More than four months, you know, they pull a credit report.

Drew Thomas: 5:59

Yeah, yeah. So, this is interesting. So, this comes from Investopedia, a September 2022 report from the Consumer Financial Protection Bureau found that from 2019 to 2021, the number of buy now pay later loans in the United States by the five lenders it surveyed grew from $16.8 million to $180 million. Yeah, I mean, that's crazy. I mean, it's, it says it's branched down into areas like travel, pet care, groceries, gas. And most loans range anywhere from $50 to$1000. And I'm not trying to disparage anybody, but I can't imagine a situation where I would have to do a buy now pay later for $50. I mean, that to me, to me, I would rather set$10 aside out of every pay, yeah, and wait two months and get my $50 item than to take out a loan for it.

Jeff Matevish: 6:52

I guess it's a, you know, how bad do you need, is it a want or a need too?

Drew Thomas: 6:55

Well, that's true. If it's for I mean, they're saying groceries in here, right? So, if it's groceries, and you got to feed your kids, you know, I mean, you can't, maybe you can't wait, that's a good point. It says here that however, it says users of buy now pay later services were far more likely in their research to have bank overdrafts, payday loans, and other high-interest financial products, indicating that they are more financially vulnerable than non-users of buy now pay later financing. So, essentially, what they're finding is that these are people that may already be in debt. And now you're taking out even more debts without necessarily going through the credit score process and all this stuff. So, you could, you could end up in over your head pretty fast. Yeah, yeah. And I don't know, like, for me, like, this still feels like a credit card. But it's not a credit card, I guess. I mean, it's somewhere between credit cards and loans. And I mean...

Drew and Jeff: 7:46

It's like a prepaid credit card. Like you can't. Yeah, and the kind of not even though Yeah, you're right.

Drew Thomas: 7:51

I don't know. They just feel like, I mean it feels like a good opportunity for people. And I think that it's presented in a way that it could be a useful tool, but you've got to be so disciplined about making sure you use it, right. Because, is there any limit to how many of these you can have? Not that I saw? So I mean, that's the other that's the thing, you know.

Jeff Matevish: 8:09

Actually I did it, it was like $30,000, or something like that. I mean, it was, it was pretty high.

Drew Thomas: 8:14

Especially if you're taking one out for $100 purchase.

Jeff Matevish: 8:17

Yeah. And if you have, you know, you're predisposed to, you know, overdrafting your, your bank accounts and just have poor spending habits. Yeah, you can get out of hand real quick.

Drew Thomas: 8:27

Yeah. Because you could have you I mean, it's easy to justify that to yourself, right, you're seeing you're, you're seeing this product, and it comes up on the screen, it says four equal payments of, I don't know, $15. Right. I can, I can manage that I can, I can do, it's attractive, I can do $15 for the next four months, right? But you don't always remember that you've done this six times already this month with other things. Yeah, yeah. So, now instead of it being $15, it's actually fifteen times six, because you've done this with four or five other products before this one. So, and there's, and there's...

Jeff Matevish: 8:59

And those could all have, have varying rates too, interest rates.

Drew Thomas: 9:03

Yeah so let's talk about that. So, you said that there are interest rates on some of these?

Jeff Matevish: 9:07

Yeah on some of the products and they can get pricey. I mean, it's 10% to 36%. APR. Yeah. So, for this Affirm product, at least.

Drew Thomas: 9:16

Yeah, so 10% doesn't sound so bad. But 36% is more than a lot of credit cards are. It sure is. Yeah, so you have the advantage of being able to get what you want now, and possibly, depending on the value of the merchandise, maybe you get it interest free, maybe you don't.

Jeff Matevish: 9:33

But even if there is interest, the good thing is that it is simple interest, it's not compound interest. So, you're not paying interest on interest.

Drew Thomas: 9:41

Okay, well, that's a good point. Yeah. Because we're going to talk, and I'll let the cat out of the bag just a little bit here. We're going to talk later this month in the full episode of Bank Chats with the CEO of AmeriServ, who talks a lot about interest rates and talks about how that can be beneficial to you and compound interest when it comes to when you're putting money into the bank. But also, you know how you calculate interest when it comes to lending. So, you definitely want to tune in for that one later this month. But so some disadvantages, certain downsides with buy now pay later, it says that by now pay later loans generally won't help you establish or build good credit, because of the way they're structured. I guess they're not really hitting your credit report. So, they don't really help you. And it also, so let's

Jeff Matevish: 10:23

And, who pays you? How do you get paid? How do talk about returns. It says, if you want to return an item you bought using a buy now pay later plan, it can get complicated because it says you should get your money back, but there can be a delay until the merchant informs the BNPL lender of the refund. You may have to keep making payments in the meantime, and if you don't, then the payment might be marked as tardy or missing resulting in added fees, and a possible ding onto your credit score. So, that, that also becomes problematic if you're buying something that is relatively low cost, like say, maybe you're buying a, I don't know, a modem for your house, like a Wi-Fi or a Wi-Fi router, probably going to be about $200, right? And if you're using a buy now pay later plan and you buy this thing, and you get it, and then you use it for 15 or 16 days and it dies. And you got to return it. Well, you're paying for, you're you're paying for a broken piece of equipment. And you get your refund?

Drew Thomas: 11:17

Yeah that's a good question. Does it come from the so they can they can get all that squared away. merchant? Or does it come from the lender? Yeah.

Drew and Jeff: 11:28

I don't know, I don't either. Make sure, make sure you really want that product and you're not going to return it.

Drew Thomas: 11:34

Well yeah, but sometimes you can't, yeah, I mean, if it's broken, you're not going to keep it just so you can keep making payments. Yeah. I mean, I'm sure you get, I'm sure you're gonna get your money back from somebody, but the problem becomes that delay then in trying to get everybody on the same page.

Jeff Matevish: 11:49

Yeah, you're gonna have that revolving door of you know, the vendor says, oh, no, the lender has to pay. And then the lender says, no, the vendor has to pay and, you know, you don't know where you're gonna get your money.

Drew Thomas: 11:59

Yeah, I mean, you can run into that with a lot of things, you know, but definitely, when it comes to this, it sounds like. Now, some some advantages. So, I mean, it says here that, on the flip side, these kinds of buy now pay later plans can help teach teens about paying monthly bills. If you agree to purchase the jacket with that kind of financing, you could require your teenager to pay you $25 every month until it's paid off. So, it kind of, greases the wheels and teaches them a little bit about having to budget, right. Definitely. Especially if you're on the I mean, if you're willing to be on the hook for it as the parent, yeah. Right. And then you're saying to your, to your son or your daughter, hey, you know, you're gonna pay me $25 a month for that video game that you wanted. Yeah, that we did on this buy now pay later plan. Yeah. That being said, you probably could do that anyway without the buy now pay later.

Jeff Matevish: 12:48

Yeah, but you can, you can show them, you know, this is actually how it works, I guess.

Drew Thomas: 12:52

Yeah. Yeah. But I don't know, to me, it would be if you as a parent are doing that, then you, then maybe as the parent, you just buy it outright, and you, and you set up your payment plan with your teenager, you know, just between you guys. It's a little safer. Probably. Yeah. You don't forget to make a payment. Yeah, yeah. Dollar limits on buy now pay later loans, according to this, it says that they vary from provider and retailer to retailer. So, some, you may have a per purchase limit. Some you may not.

Jeff Matevish: 13:18

It's not so based on your credit history, for your credit limit.

Drew Thomas: 13:22

Yeah no. And so that goes back to what you were saying about having, what$30,000 limits, I mean, some of them might be that, some of them might have no limits, some of them might have lower limits. Soj, I think the lesson to take from this conversation is, if you're getting into one of these, buy now pay later situations, make sure you're reading the fine print and make sure that you understand exactly what you're signing up for, what kind of interest you may or may not be paying, how often your payments are due. Because I can imagine that most of these are probably monthly, but maybe some of them aren't. Some of them could be every two weeks. Yeah, you know, or something like that. So, you want to make sure that you fully understand what you're getting yourself involved in before you sign on the dotted line. Because it's, it sounds great upfront, you know, hey, you know, this $100 item is only$15 for the next six months. Did I do the math right on that? Some, something like that. But$25 a month for the next four months. How's that?

Jeff Matevish: 14:16

Smaller number better than big number.

Drew Thomas: 14:18

Yeah. Are you, you're just really busting my

Jeff Matevish: 14:18

Yeah, I see more of these popping up in the chops today aren't you? A small number better than big number, that is very true, thank you, Jeff. So, and especially if you're, I guess the other thing too, getting back to the very beginning of the conversation, especially if you're younger, and you're doing this because you know, maybe your, maybe your future, probably. Yeah. Yeah. salary isn't as high as you expect it will become at one point in the future. You know, if you're 22 years old, and you're fresh out of college, and you're making a lower value salary, and yet you still want that new TV or something like that. And again, sometimes it's not even what you want. It's what you need. Yeah, right if you're moving to a new city for work and your parents aren't around, you don't have family, you don't have friends and you have to furnish an apartment or something. Sometimes you don't have much choice but to go into a little bit of debt. But you got to be smart about it. Yeah. You know, and whether that's using a credit card or a traditional bank loan, or one of these buy now pay later things. You just got to be smart. Hey, you know, and really make sure you understand what you're getting yourself into, so.

Drew and Jeff: 15:25

I can only imagine what is probably today. Oh, yeah, I can possibly see banks looking into stuff like this, you know, different types of lending products that might be similar to this kind of thing. Because these this, like, the companies are like a firm, for example, they're not banks. They're what they call fintechs. They're financial technical hybrids. Yeah. And so that's a little bit of a different animal to like, kind of like Pay Pal, I guess. Right. So, you know, also be aware that some of those types of companies are not held to the same standards as banks when it comes to how your money is managed, and what kind of rules they have to follow and things like that, too. So, that's, that's another thing to keep in mind. But yeah, did we cover everything? I think so. All right. Well, then you know what I think then maybe we just wrap this up then. Okay. All right. Hey, thanks, Jeff. Hey, thanks Drew, bye.

Drew Thomas: 16:31

This podcast focuses on having valuable conversations on various topics related to banking and financial health. The podcast is grounded in having open conversations with professionals and experts with a goal of helping to take some of the mystery out of financial and related topics, as learning about financial products and services can help you make more informed financial decisions. Please keep in mind that the information contained within this podcast and any resources available for download from our website or other resources relating to Bank Chats, is not intended, and should not be understood or interpreted to be, financial advice. The host, guests, and production staff of Bank Chat's expressly recommend that you seek advice from a trusted financial professional before making financial decisions. The host of Bank Chats is not an attorney, accountant, or financial advisor, and the program is simply intended as one source of information. The podcast is not a substitute for financial professional who is aware of the facts and circumstances of your individual situation. Thank you for listening. Please check out our full library of episodes which can be found on the ameriserv.com website. You can also download or stream the podcast from your favorite podcast app.