“Buy now, pay later” has graduated from fad to trend in the retail-payments sector – for better or worse.
Financial firms and retailers have been using the buy now, pay later model – informally known as BNPL – for some years.
In mid-2022, online giants like Amazon.com (AMZN) and StubHub, among others, have been encouraging customers to pay for goods and services with BNPL. That's pushed the program into the mainstream.
Here’s how BNPL works in the real world.
With buy now, pay later, a customer buys a product online -- in some cases at in-store retailers, too -- and agrees to pay the full amount in installments at a specific payment amount over a set period.
"For example," the report says, "if a consumer buys a $600 smartphone via BNPL, that consumer agrees to pay $150 in four separate installments over four weeks, until the full purchase price is paid. The first payment is made at checkout."
Once the customer agrees to the deal, he or she must make on-time periodic payments over weeks or months. The payment plan is usually interest-free, with fees assessed only if a payment is late.
Back-to-School Shoppers Get Onboard
In the latest twist in the BNPL saga, back-to-shoppers are leaning into the periodic-payment model to buy goods for the school year.
That’s the outlook from a new TransUnion study, which says roughly 40% of shoppers said they’d use BNPL services to buy back-to-school supplies compared with just 2% of consumers responding to TransUnion’s 2021 Consumer Holiday Shopping survey.
Consumers seem to be pointing to high inflation as the main reason they're turning to BNPL loans. The study noted that 55% of consumers expect to spend more on their back-to-school shopping this year, with inflation driving the increase.
The study also found that among shoppers who use BNPL for back-to-school shopping, 62% are doing so to buy books and other items needed for school, while 52% are using it to buy a single expensive item, like a computer, that’s needed for school.
The Groups Using BNPL for Back to School
“Millennials are by far the largest group of consumers represented here, with 47% of that generation using BNPL for their back-to-school shopping,” the study stated.
The study authors also said that consumers seem to be just fine using BNPL for school-based purchases.
“Families are especially hard hit by inflation, and back-to-school shopping represents a significant cost on top of everyday expenses,” said Cecilia Seiden, vice president of TransUnion’s retail business.
“The ability to spread those payments out over time interest-free is a very attractive option to parents and students who are already stretched thin financially.”
What Back-to-School Shoppers Need to Know About BNPL Loans
Consumer-finance specialists say back-to-school shoppers may not be completely up to speed on BNPL loans.
“Inflation has many families struggling with back-to-school shopping, and some are turning to [BNPL] plans to try and alleviate the financial pressure,” said Keith Sultemeier, president and CEO at Kinecta Federal Credit Union, Manhattan Beach, Calif.
“Though BNPL options can come with zero interest and fees if you pay on time, they are still, at their core, a loan. Not reading the fine print, or abiding by the rules of a BNPL contract, can cost you more in the end.”
Problems with BNPL’s really stack up the more you use them.
“It’s common for people to try and juggle multiple BNPL plans at once, and that’s when it can get risky,” Sultemeier said. “It’s easy to fall behind or overdraw your account, which tacks on late fees from the BNPL provider and penalties from your financial institution.”
Credit-wise, BNPL users need to tread carefully.
“BNPL’s credit effect can vary depending on the provider,” said Kendall Clayborne, a certified financial planner at Sofi.
“Some providers report to the credit bureaus, ultimately reflecting on a credit report in the form of an inquiry, debt utilization, and even late or missing payments if you haven’t been paying it off in a timely manner.”
“However, if you are responsible with your payments, making on-time payments to your BNPL could help improve your credit score,” Clayborne noted.
Tips and Strategies on BNPLs
Money experts offer several tips for parents who are struggling to cover back-to-school costs and are turning to BNPL payments.
“Take advantage of sales-tax holidays if they’re available to you,” Sultemeier said. “Use any credit card rewards or cash-back bonuses that can help lower costs as well. And monitor upcoming Labor Day sales.”
The best usage of BNPL loans by back-to-school shoppers may be to use it for the most expensive and essential back-to-school purchases.
“Those are the items consumers aren’t able to cover the cost for up front, like a laptop or tablet, as long as the purchaser can afford the monthly payments,” he added. “Reading the fine print is essential for all financing options.”
Take these additional tips with you on your next BNPL back-to-school excursion.
Create a shopping list and divide purchases into essentials and non-essentials. “Use a budgeting app like SoFi Relay to monitor your budget and spending as you begin shopping,” Clayborne said.
“Begin with the essentials and work your way down the shopping list. If you run out of room in the budget before you get to the nonessentials, then those purchases will have to wait until you have the room in your budget.”
Borrow or buy used supplies from older friends/neighbors/family members. Every class in high school or college seems to require a different type of calculator or textbook, and that scenario can lead to a big price tag for schoolbooks.
“Check with friends and family,” Clayborne said. “They might’ve taken the same class last year and have the materials you need. You may even be able to swap, borrow, or buy books from them at a fraction of the price of a new one.”
Take stock of what you may already have from the previous school year. Leftover pens, pencils, notebooks, and last year's book bag still may be in great condition. So why not use them again?
“Look through what you already have at home before purchasing everything on this year’s back-to-school shopping list,” Clayborne added. “It can be tempting to stock up when you’re at Target, (TGT) but taking stock of what you already have or can reuse will minimize unnecessary spending.”