It’s happened to all of us. We’re shopping online for something big (or just something we can’t afford). We consider how we can save up for the item and budget for it . . . but then we see something that says, “Just 5 payments of $19.50.” Suddenly, getting that item right now seems possible—everyone can make $20 in their budget somewhere, right?

This is a tactic that’s been used for years! Long before online shopping, you’d see TV ads that did the same thing. You’d call, give them your card, and just pay “10 payments of $15.99, plus shipping and handling.” For big-ticket items, this idea of buy now, pay later feels like a big win for families on a budget. 

But, it’s not. Not at all! We’ll get into the details of “buy now, pay later” plans and why they’re bad for your budget and money goals. 

The Ugly Truth of Buy Now, Pay Later 

Installment Plans vs Buy Now, Pay Later vs Layaway

There are a few versions of the “buy, now, pay later (BNPL)” system, but they’re all pretty similar! You get to reserve or buy an item right now, but you don’t have to pay for it all up front. Here are the two main types:

• Buy Now, Pay Later (BNPL): This is short-term financing. (Yes, DEBT!) You get the item immediately, but you can pay for it at a later date or with payment installments. This usually is interest-free as long as you pay within the allotted time. 

• Installment Plans: With an installment plan, you get the item right away, but you just pay a portion of the ticket price. The rest of the cost is divided up across multiple months, allowing you to pay in interest-free installments. Again, this is finances, and it’s debt! 

• Layaway: Layaway is a bit archaic now, but it’s where you make a down payment on an item (or cart full of items) and the store holds it back for you until you’ve paid it off. Again, these are usually done in installments. Once you pay for your things, the store will release them to you. In the heyday of in-store shopping and Black Friday, this was a big deal. (You may remember the Walmart ads from years ago.) Just like the other options, this is just debt with a bow on it. Don’t be fooled. 

How Does Buy Now, Pay Later Work?

Anytime you see companies offering a service like this, you have to ask yourself: What’s in it for them? They’re not giving you products you haven’t paid for out of the goodness of their hearts, right? Nope. They’re banking on you not making your payments. When you don’t, they make money on the interest and late fees. Just like a credit card company! All of this is cleverly disguised debt! 

What Payment Plan is Best?

None of them. Not only are payment plans and BNPL options just forms debt, but they also create bad money habits. Being patient and waiting for gratification is important for good financial discipline. Saving for what you want or need is essential for you to win long-term with your money!

You won’t be able to strengthen your discipline muscles if you’re always getting what you want now, and paying for it later. In fact, you’ll probably fall deeper and deeper into the BNPL hole. It’ll start with a $500 TV, but soon it’ll be a $6,000 hot tub or a $14,000 snowmobile. 

Instead of using payment plans, develop a sinking fund for your big purchases! Put a little in a special savings account each month, and after a few months, you’ll have enough for your purchase. We call this SNBL. Save now, buy later. It’s a much better system. 

Should You Use Buy Now, Pay Later Options?

No. Under no circumstances should you use “buy now, pay later” options. If you can’t afford to purchase the item outright, you can’t afford it at all! Instead of paying $20 a month to a creditor for 5 months to get your child their birthday gift, plan ahead and put $20 a month into your sinking fund for 5 months. It’s the same outcome, but it’s delayed gratification and no debt, both of which will be better for your financial future! 

Payment Plan Statistics

• BNPL users on average borrow about $1,000 a year. 
• 72.6% of BNPL borrowers make less than $75,000 a year. 
• Most BNPL borrowers are between 25 – 44 years old.
• BNPL borrowers are almost twice as likely to carry other debt like retail accounts, personal loans, and student loans. 
• BNPL borrowers are more than twice as likely to be late on payments than other types of debt users. 

How to Make Big Purchases Without Payment Plans

Step 1: Determine the timeline of when you need the product or service. 

First up, decide when you need the item or service by. This is where planning ahead comes in handy! You can plan for things like upcoming birthdays, regular car maintenance, family trips, clothing needs, school supplies, and other expected expenses. Set a date for when you know you need to have the money by, and don’t wait for the last minute to figure out how you’ll pay for things. 

Step 2: Look at your budget and determine what you can save. 

Next, look at your budget, and see where you can find margin for this upcoming expense. Then, compare that available amount to your timeline. For instance, if you can find $40 to set aside each month and you have 6 months before the birthday or other event, then your budget is $240. That’s what you’ll have to spend when the time comes! 

Step 3: Establish a sinking fund and save. 

Now, you need to set-up a sinking fund! You can do this by actually opening another savings account, or you can just keep track of the amount you have set aside in your budget. Each month, put that $40 (or whatever the number is) into that sinking fund. 

Step 4: Use your sinking fund to make your purchase. 

If you set your budget and follow it, in 6 months, you should have your $240! Now, you can buy the birthday gifts without stress AND without using “buy now, pay later” options. Get the idea? This is your key to winning with your finances, even when you have big purchases! 

Don’t get sucked into the trap of buy now, pay later!

BNPL may seem like the perfect solution for a family living paycheck-to-paycheck that needs to make big purchases—but it’s not. Just like credit cards aren’t a true safety net, BNPL options are not a true savings plan. A sinking fund will help you make the same purchase with the same method, but with none of the risk! Don’t “buy in” to this trap!

For more financial advice, head over to the Strong Tower Consulting blog! But, if you want a more personalized approach, let’s meet for a free session. If you’re feeling tempted to do BNPL because you’re in a financial bind, we can discuss other options and find a long-term solution to your money problem!