Sara Rathner, Senior Writer at NerdWallet, joins Cheddar to discuss how Buy Now Pay Later methods have changed the way we shop. Watch!
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00:00DoorDash customers will soon be able to buy it now and then pay for it later.
00:04It may sound enticing, but what risk does Buy Now, Pay Later service come with?
00:09Here to help us unpack it all is Senior Writer at NerdWallet, Sarah Rathner.
00:12Sarah, really grateful for your time.
00:14Thanks for being here.
00:15Thank you for having me.
00:16So how do Buy Now, Pay Later services actually work, Sarah, and in what ways do they differ
00:21from say traditional credit cards?
00:24With a Buy Now, Pay Later service, you can break up one purchase into multiple installment
00:29payments over time, and in some cases, you might pay a flat fee or even interest, but
00:34that depends on the service that you choose.
00:36That's different from traditional credit cards where you make a purchase, and then you're
00:40billed at the end of the billing cycle.
00:42You either pay it in full or you only pay part of it, and then what's remaining becomes
00:45your credit card debt.
00:47What are the biggest advantages and disadvantages for consumers using Buy Now, Pay Later?
00:53There's a really low barrier to entry when it comes to Buy Now, Pay Later services.
00:56There's no credit check.
00:57There's no lengthy application process.
00:59It's about as quick as just making a purchase in the first place.
01:02So for many consumers, that's really appealing, especially younger consumers who've really
01:06gravitated to these type of installment plans.
01:09And that's really all there is to know, Sarah.
01:13Well, certainly the important stuff.
01:15I know that this is frequently referred to as phantom debt.
01:19That's the phrase we hear over and over again because Buy Now, Pay Later companies don't
01:22actually have to report debit burdens to major credit card bureaus.
01:27I wonder, Sarah, should they be forced to?
01:30Is there a big risk to not having that be in place?
01:32Well, if you miss payments, that is going to be reported to credit bureaus.
01:36So you really want to be cautious when you're entering into these sorts of plans.
01:40Make sure that you have the money on hand to make your payments when they're due because
01:44that can hurt you over time.
01:46What is not happening is when you enter into these sorts of installment plans in the first
01:50place, that's not yet reported to credit bureaus.
01:53And so that's not going to potentially help or hurt your credit.
01:56Are there consequences to unmonitored debt?
01:59Well, whether it's monitored or not, there's always consequences to debt because it can
02:05affect your ability to meet your other financial obligations.
02:08If you're spending a lot of money every month on debt payments, your bills don't stop.
02:12You still need to pay to have a roof over your head to buy food.
02:15And so if you have all of these monthly obligations, it's going to be hard to keep your head above
02:20water in many cases.
02:22The main differentiator, one of them, as you've said, between Buy Now, Pay Later and more
02:25traditional credit cards is the lack of interest payments from the user.
02:30I wonder, is it a challenge, is it a problem for economists or analysts who cannot see
02:35this level of national debt taken on by consumers?
02:39It could potentially be a problem, but really what consumers need to understand is how this
02:43affects them at an individual level.
02:44And that's really important to know because when you enter into these plans, you are making
02:49a commitment to pay them back.
02:51And if you don't, you could be subject to late fees and interest payments.
02:57I believe it was a quarter of Americans surveyed by NerdWallet last year said they've used
03:01Buy Now, Pay Later services in the last 12 months.
03:05Does that high percentage surprise you?
03:08And do you think we can expect that number to even go higher, Sarah?
03:11It doesn't surprise me.
03:12Like I've said, because of the low barriers to entry to these types of plans, it is very
03:17appealing to consumers, and it can be a helpful tool when you're making a big purchase.
03:21You pay it back in four installments instead of making one lump sum payment.
03:25That could be really helpful to your budget.
03:27Most people are paid in increments from their jobs, and so being able to make smaller payments
03:33that line up with your paychecks can be very useful.
03:36But again, you do want to be mindful whenever you're borrowing money.
03:40What does this look like for the retailer side of things?
03:42Is it advantageous one way or another for major retailers to accept traditional credit
03:47cards versus Buy Now, Pay Later, and are there advantages to them to leaning into platforms
03:53like Affirm or Klarna?
03:55It is advantageous to retailers to accept these forms of payments because we found that
03:59buyers are more likely to make purchases and spend more when they have the option to pay
04:04in four.
04:05And so from a merchant perspective, this is just giving consumers more options, more ways
04:11to pay, and making it a more frictionless experience.
04:14Whenever you take away that friction, you make it easier for people to spend money.
04:18What does the data tell us with regards to default rates of Buy Now, Pay Later regular
04:23customers versus customers who use traditional credit cards?
04:27I don't have that data off the top of my head, unfortunately.
04:30But again, it is really important in both instances when you're using a traditional
04:35credit card or using a Buy Now, Pay Later plan to avoid going into default.
04:39Those sorts of things can affect your credit scores over time, and it can cost you money
04:43when it comes to things like late fees.
04:45A lot of headlines as of late about the anticipated upcoming IPO for Klarna.
04:50It's actually going to be right here at the New York Stock Exchange where I am.
04:53How significant do you think an IPO like that is, and what does it mean to have a high-profile
04:59partnership that was recently announced between companies like DoorDash and Klarna?
05:04These sorts of news items bring more attention to the companies that provide these services
05:09to consumers.
05:10So not only are these types of companies more familiar to people who are on Wall Street,
05:15but they're more familiar to people who are on Main Street.
05:18And if it becomes a bigger company, they form these additional partnerships.
05:22That just means that consumers have more opportunities to use these companies as payment methods.
05:29There's a lot of jokes that have been made on social media about the DoorDash component,
05:32about people basically, you know, you order a burrito from your local favorite Mexican
05:37restaurant through DoorDash and you're using something like Buy Now, Pay Later.
05:42What's your kind of take on what that conversation has looked like?
05:44And is that kind of somewhat comedic example how you expect that particular partnership
05:50to play itself out?
05:51Is it first relatively small purchases that get delivered directly to people's doors?
05:56I mean, it's certainly a sign of the times that you might have to pay for one meal in
06:01four installments.
06:02That's not an ideal use of Buy Now, Pay Later.
06:05Maybe if you're ordering enough to cater for 100 people, it could be helpful.
06:09But if you're ordering in smaller amounts, hopefully you have other ways to pay that
06:14don't put you into debt.
06:15How can consumers best make informed decisions when considering Buy Now, Pay Later services
06:21for their purchases?
06:22Before you agree to any plan and commit to it, read the fine print, understand what you're
06:28going to owe in total to pay in installments and what consequences there might be for you
06:33if you make late payments.
06:35And also review your budget and make sure you have the money to make these payments
06:39in full and on time until the item you've purchased is completely paid off.
06:43Sarah Rathner is a senior writer at NerdWallet.
06:45Sarah, really grateful for your time and the perspective to all help us understand this
06:49very important story a little bit better.
06:51Sarah, thanks a lot.