Buy now, pay later (BNPL) is billed as a way to help you budget, except the ‘budgeting’ is backwards and the fiscal ‘responsibility’ dangerously reversed. But, despite its shortcomings, disciplined money managers are today using BNPL as part of a smart financial coping strategy.
BNPL facilities are still largely unregulated because they don’t charge interest, so they slip through the cracks of the consumer credit code. While this is supposed to be changing, a government crackdown has seen delay after delay. The industry itself has now stepped in to recommend “specific and clear commitments” to assist people experiencing “vulnerabilities”.
That’s laudable. These commitments include a recommendation to use digital tools to identify suspicious behaviour, increased communications with customers and support for people experiencing financial hardship.
So, given BNPL was designed to take on credit cards head to head, how do the two compare?
Credit cards offer up to 55 days interest-free and have up to that number of days before you need to clear your balance in full (if you are to avoid interest).
Also by Nicole Pedersen-McKinnon:
Meanwhile, although all BNPL offerings are slightly different, you often get up to eight weeks to pay back your spending – you usually need to do so in equal instalments each fortnight. As I mentioned, there is no interest and the revenue for providers comes in the form of fees if you miss repayments (retailers are also charged 4 per cent for the privilege of using BNPL).
BNPL facilities come with none of the perks of credit cards. There are no rewards points for flushing your spending – prudently – through a banking facility. There are no consumer protections for faulty products. And there is no complimentary travel insurance.
BNPL is simply a spending facility you get to repay over subsequent pays. A smoothing mechanism for your money, if you like.
And the problem with BNPL is that you can access and spend your whole pay ahead of time. Providers will tell you this isn’t true but, until the industry is regulated, it is. There are currently no credit checks required and there’s usually not even an affordability assessment you need to pass. You also have the ability to take out multiple BNPL services, which could eat up your whole income because it’s pre-committed on previous spending.
For all these reasons, if you have a problem with spending or times are just too tight right now, it’s not for you. But, if you are disciplined and just need a bit of a short-term money reprieve – maybe because you unexpectedly need to replace, say, white goods – there is a way BNPL can help.
This is a way to work the system so that it works as a type of longer-term lay-by, except that you get the goods you need upfront, and it involves BNPL and a credit card.
A clever delay-pay and credit combo
I repeat: this technique is not for the undisciplined. It’s also not for the already indebted. But, if neither is you, here’s how you can kick the cost down the road by as much as a third of the year.
Take out a BNPL facility and make your necessary purchase through it. That will give you probably eight weeks’ grace.
But hook your BNPL repayments to a credit card – this is why I am saying it is a sophisticated and specialist strategy only for those who are extremely financially responsible but who are perhaps stuck in a temporary tough spot. So, your fortnightly instalments will come out of that credit card. Remember, don’t miss them or you’ll pay penalties and go backwards.
On each instalment – the first probably a fortnight in – you will then potentially get up to an extra 55 days interest free on your credit card. You only need to clear the card at the end of the statement period – of course, you do need to clear it so you don’t incur interest.
In combination, if you’re in a tiny bit of trouble right now, you could work the spending system to use someone else’s money for as much as four months to replace something that you need.
Don’t try this at home – unless you know it will help and not hurt you. But, if so, a combo could relieve a crisis.
Nicole Pedersen-McKinnon is the author of How to Get Mortgage-Free Like Me, available at www.nicolessmartmoney.com. Follow Nicole on Facebook, Twitter and Instagram.
Follow Yahoo Finance on Facebook, LinkedIn, Instagram and Twitter, and subscribe to our free daily newsletter.
Credit: Source link