Gone are the days when you can only simply pay your purchases directly through cash or on credit with your checking account or with a credit card. Now, you can pay via online fund transfers, BitCoin or cryptocurrency, and online payment systems such as PayPal or even buy now pay later no credit check no deposit.
One such payment option that is also on the rise today is interest-free finance or more commonly known by its simple and self-explanatory nickname of “buy now, pay later“. In fact, buy now, pay later has risen so much in the recent years that the number of transactions involving this payment scheme has increased by as much as 500% in the last 24 months.
Interest-free finance or buy now pay later, is a rising payment option in the country because it allows you to purchase items even though you don’t have a credit line with your bank and even though you are not even financially fit for credit purchases. But what exactly is interest-free finance?
What is interest-free finance?
As its other name might have already suggested, interest-free finance allows you to purchase items right now and pay for them later when you already can. In a sense, you can own the item today even though you don’t have enough money to pay for it now. It really seems like a very simple payment scheme because you are allowed to pay for your purchases only when your finances permit you to.
Sounds familiar? Well, interest-free finance works a lot like credit purchases in a sense that you are technically buying the item today without paying for them right away. And because of how buy now, pay later users are increasing faster than ever, some would say that this kind of a system has become the new credit card.
However, there are key differences between interest-free finance or buy now, pay later and credit cards. First of all, there are no interest fees in buy now, pay later systems. That is why it is called interest-free finance in the first place. Second, you do not need to open a credit line with a bank to use interest-free finance. And third, service providers are not obliged to look into your financial situation or your credit status to allow you to use their buy now, pay later system. Because of those key differences between interest-free finance and credit card, you might not wonder anymore why it is a payment scheme that is currently on the rise.
How does buy now, pay later work?
Interest-free finance works by signing up with a third-party financer in a store or through their website online. These third-party financers offer you credit limits that are usually somewhere between $1000 and $2000. However, some facilities even offer credit limits that are as high as $30,000.
After signing up with the third-party financer or facility, you can now make your purchase. There are some providers that have partnered themselves with certain retail stores or merchants. Meanwhile, there are also third-party financers that are virtually usable anywhere as long as the store accepts credit as a form of payment.
Soon after making your purchase, you are now obliged to pay back what you had just spent. Most providers offer repayment through installment basis. And, most of the time, repayments are done by deducting the amount from your nominated bank account. This makes it easier for you to repay for your purchase as you are not asked to pay for the entire full amount in one single repayment.
In this kind of a system, how are the third-party financers or providers making money in the first place? Well, first of all, they charge you a fee for every transaction you make. However, they also make money by charging you fees or interest for every late payment you make.
Repayments are deducted from a certain account or card that you nominated when you signed up for this kind of a payment system. But once you do not have enough in your bank account for the repayment, you will be charged a fee for failing to make the payment. These fees tend to stack up as most providers increase the fee the longer the time that you fail to make the repayment. There are even those that charge you a monthly fee if you have an outstanding balance.
Buy now, pay later programs might seem enticing but the damage done tends to stack up and spiral out of control the moment there are insufficient funds in your account and when you miss a repayment. In a sense, it’s not always rainbows and butterflies in the world of interest-free finance. And, if you look at it, it isn’t as interest-free as you might think it is.
Why use buy now, pay later programs?
Now that you have a gist of what a buy now, pay later program is and how it works, these are the reasons why you might want to consider using it as a form of payment in your future transactions and purchases:
1. You are keeping your money in your account for longer periods of time
One main feature of banking institutions is that your money only tends to increase over time if you keep it in your account for longer periods of time. Interest will not run in favor of your savings account if you always take your money out of the bank to make transactions and purchases.
That said, if you make a purchase using interest-free finance or buy now, pay later programs, you will be keeping your money in your account longer because you do not have to take it out to make a transaction. For example, if you have $1,000 in your account and you are planning to purchase something that is worth $500, you can simply purchase it through interest-free finance so that your $1,000 is left untouched. You merely have to deduct certain amounts from your account through installment basis for repayment without having to touch the entire $1,000. In that sense, you are keeping your money in your account longer while it earns interest.
2. Set up is quick and easy
If you want to purchase something using interest-free finance or buy now, pay later, then set up is so quick and easy. You just have to sign up for the service on the spot when you are in the store. If you are purchasing something online, you only have to choose it as your option of payment and then sign up for the service. You also have to nominate a debit card or a bank account where repayment will be deducted. It is that easy. You no longer have to the bank to ask them to approve your application. And approval is also so quick and easy.
3. They don’t check your credit status
The problem for most people when they apply for a credit line with a bank is that the bank does a background check to see if your credit is good enough. Most of the time, banks look at your past transactions, your current financial status, and your other outstanding debts. In that sense, not everyone will be able to open a credit line especially if they have bad credit or if their income is not good enough for the bank.
However, that does not happen when you use the buy now, pay later programs. Third-party financiers or providers will not look into your financial capabilities or credit status. The only important thing for them is that you will be able to make repayments on time. And if ever you do fail to make your repayments, it is not even much of a problem for them because they charge you fees for that.
4. You can shop even before payday
Payday is usually the best day of the month for most people living off a monthly salary. That is the time when they can splurge the most after paying off their bills and debts. But the problem is that payday is usually an annoying day for shoppers because of how there are usually more people in stores and in malls. Also, most people tend to avoid shopping before payday because of an obvious financial hindrance.
However, by using buy now, pay later programs, you can actually splurge or shop even though payday is still several days away. This is because you do not need to have money in your wallet for you to actually make a purchase. In fact, you do not even need to have money in the bank at that very moment. All you need to do is to make sure that your account has enough funds by the time you have to repay for what you purchased. In this sense, you can avoid the hassle of going to the mall during payday.
5. Avail of that limited time offer right now
There are a lot of instances where certain items or offers are only available for a limited time. In certain cases, some items tend to run out a lot quicker than most. But the problem here is that you don’t always have enough money on you to available of that limited time offer or of that limited item. And by the time you already have enough money, the offer or the item might not be there for you anymore.
But with interest-free finance, you can make that purchase right at the moment the offer or the item is made available for you even if you don’t have enough money in your wallet or in the bank. That said, you can simply buy it now without worrying about whether you have the money on you at that very moment.
6. The rise of buy now, pay later programs
Interest-free finance is one of the fastest rising payment schemes in the country right now. Back in 2016, the number of transactions involving buy now, pay later programs were only about 50,000. Fast forward two years later, that number has ballooned five times and is now a whopping 1.9 million. And, as of June of 2018, the total outstanding repayment balances all across the country is at $903 million. That is how much buy now, pay later has increased in just two years.
To put it into perspective, 60% of those using this payment method are 18 to 34 years of age. Those are usually the people that do not have incomes or finances that are stable enough to allow them to purchase items directly with cash. It also is not very surprising to see that 40% of those availing of these programs earn under $40,000. That means that they do not always have enough money on them to make purchases because they do not earn well enough to buy things on the spot.
With how the consuming public is becoming younger every year and with how there are a lot more people with incomes that are not really high enough to sustain normal purchasing, it is not a surprise that interest-free finance is fast becoming a rising trend. Other than that, convenience is also at the forefront of this payment method as it is hassle-free and less risky compared to other modes. It is made more available to consumers because approval is fast and because there are no background checks on your credit. And, for a lot of consumers, it is cheaper than buying using credit cards because there are no interest fees and there are limits to how much you can spend.
That said, the rising reliance on convenience in this fast-paced world and the way that consumers are now becoming more aware of their finances has also led the way to the rise of interest-free finance as a top mode of payment in the country today. After all, if there is an easier way for people with no money at hand to make a purchase, then that method of payment will certainly be more enticing than other modes.
7. How it helps people with bad credit
One of the main features of buy now, pay later programs is that it is a great payment scheme or system for people with bad credit. Yes, that’s right, you can make use of buy now, pay later programs or interest-free finance even though your financial situation or status is not very good. In fact, you can even make use of this system even if you have bad credit. But how is that even possible?
Arguably the most common reason why people get rejected when they are opening a credit line or applying for a credit card with a bank is that they have bad credit. But what is bad credit? It is basically a status that shows how you have struggled to keep up with credit payments in the past and how you tend to not pay your other obligations on time. It can also mean that you have an outstanding debt with your other creditors. At times, it may even be because you have a legal judgment that you haven’t paid for yet.
There are companies that keep track of your personal credit history to compile it in what they call a credit report. This report shows your credit history as well as your credit score so that it is easy for you, banks, and other companies to check whether your credit is deserving enough for a loan or for opening a credit line. But, if your credit isn’t up to their standards or bad (in plain terms), then you probably won’t be able to get a credit card. In other words, banks check your financial state and credit history before they approve your application. And, most of the time, people with bad credit tend to get rejected. In that sense, it will be difficult for you to make purchases when you don’t have cash on you.
Of course, it is understandable for banks to check whether your credit is good or bad before they approve your application. After all, having bad credit means that your capacity to pay for your credit transactions is questionable. That could potentially lead to disaster for a bank especially if people’s credits pile up. That won’t only lead to a possible bankruptcy on their part but it could also harm the economy similar to the most recent US financial crisis. In that sense, banks should be vigilant enough to reject your application if you have bad credit.
But that is not a problem you would face when you take advantage of buy now, pay later programs. Interest-free finance makes it possible for you to make transactions and purchase even if you don’t have money on you or even if you have bad credit because they don’t check your financial status. In fact, that’s one of the reasons why getting approved by a third-party financer is so quick and easy. They don’t care whether your credit is good or bad because they make things more convenient for you.
With buy now, pay later programs, all you have to do is to enroll a debit account where they will deduct repayments that depend on your repayment schedule. They don’t even care whether that account has enough money in it on the day of your application because what is important is for you to have enough balance in that account when repayments are made.
So, if you are a person with bad credit, this is good news for you. As you make steps into improving your credit score, you can still make transactions or purchase items by making use of buy, now pay later programs. There are almost no credit checks and you will be able to get approval fast enough to make your next purchase. In a way, it is a useful way of shopping if you are a person with bad credit.
8. What are the disadvantages of using buy now, pay later programs?
As good of a payment scheme as it is, buy now, pay later programs aren’t miracle solutions to people who love spending and shopping. Like credit cards, they also have their disadvantages. After all, everything has a catch. This includes buy now, pay later programs. That said, here are the pros of using this kind of a payment scheme.
9. You might go overboard and proceed to spend more than what you can pay for
This is something buy now, pay later programs and credit cards have in common. When you don’t have the money on you but you are still capable of making purchases and transactions, it tends to become easier on your part to buy anything in sight. This is because you are under the belief that you don’t have a limit. When you purchase with cash, you are limited by the amount of money you have on you. However, that is not always the case with buy now, pay later schemes.
Shopping without using your own money for the time being makes you feel empowered. You will be buying things left and right before you even realize that you might not even have enough money in the future to repay for all of the things you bought using interest-free finance. And knowing that your purchases are free of interest can also be so tempting. But, in the end, you will struggle to find the money to make repayments instead.
While third-party financers put a credit limit on you, it still isn’t a solution to overspending. Even though we have a ceiling on how much we can buy, that still doesn’t mean that you will only buy for what you can pay for. That is because the limit that third-party financers put on you is based on their own standard credit limits and not based on your financial capability. After all, they don’t even check your financial background in the first place.
That said, there will always be a danger of going overboard and buying things you might not be able to pay for in the future. That is a usual problem that credit card holders and those using buy now, pay later programs have. And, from that point of view, it doesn’t seem all too surprising that there is over $900 million in outstanding repayment balances all over the entire country.
10. You will be spending money you don’t have
The truth of the matter is that you are purchasing items with money that isn’t even yours. That’s right. You are merely borrowing money from a third-party financer, who will be paying for your transactions. Your obligation now is to make repayments usually by installments at a fixed schedule. But, essentially, you won’t be spending your own money when you make a purchase because you don’t even have the money in the first place. Otherwise, you wouldn’t probably be using the buy now, pay later program.
That said, the problem with spending money you don’t have is that you won’t always be sure if you will eventually get the money to make the repayments. Even though your regular income can normally cover the repayments, a lot can happen in the future. You might need to spend for something unexpectedly or you might bump into certain unpredictable financial problems. In that sense, when repayment comes, the money in your account might not be enough to cover it. This could lead to penalties and fees that tend to pile up. In short, spending money you don’t have can lead to something that can potentially hamper your finances and lead you to rock bottom.
11. Penalties will stack up to become more dangerous
This is arguably the most dangerous part of using buy now, pay later programs. While there are no interest rates when using this payment scheme, the catch is that some third-party financers charge you a certain fee for every transaction. But that is not the riskiest part. When you use interest-free finance, you will have to repay the third-party financer in installments at fixed schedules. They will deduct the repayment from the debit account or card that you nominated. That seems too simple.
However, the problem here is not having enough money in your account for the repayment. Let’s say, for some reason or another, there were insufficient funds in your account to cover the repayment. What happens here is that, if you fail to put the necessary amount to cover the repayment, you will be charged a late fee. And if you continue to fail to cover the repayment, the late fees will continue to stack up. Before you know it, it’s already impossible for you to cover the repayments and the late fees with your regular income alone.
As of 2018, about 17% of those that have used buy now, pay later programs have delayed or even borrowed money to cover the repayments. Yes, it may eventually come to a point where you have to borrow money again to pay for something that you also essentially borrowed. Paying a loan with a loan isn’t exactly the best way to improve your financial standing. In the end, you are just technically fighting fire with fire.
In this sense, you will be trapped in a loop of endless loans and credit. The subsequent loans to help you make repayments might be easier to pay off in the long run but it still isn’t exactly something that improves your financial status. You will still end up as a slave to credit in the end and you might find yourself in an inescapable pattern of borrowing from one person to another.
12. It doesn’t end
If there is a bright side to having bad credit, it’s that credit card companies and banks would probably continue to reject your application. Because of that, your credit transactions would minimize and that you will probably only make purchases with the money you have on you. And, before you know it, your credit standing will begin to improve day by day as you adjust to a life without credit.
However, when you use buy now, pay later programs, your transactions won’t end even if you have already incurred a massive debt after a series of delinquent repayments that resulted in stacked up penalties. Because third-party financers don’t check your financial status and credit standing, you are free to use this type of payment scheme as much as you want and can. It’s going to be a hard habit to break even though your repayment debts have already piled up to massive proportions.
In this sense, you might find yourself in an even deeper hole than you would have you opted to use credit cards. At some point, buy now, pay later programs are less riskier and much more convenient. However, the dangers of using it can potentially be catastrophic depending on how you use it.
13. It is only dangerous when we use it dangerously
It is true that buy now, pay later programs have their cons and disadvantages. There are compelling reasons why you shouldn’t make use of interest-free finance in the first place. It can be quite problematic in your case if ever the disadvantages and the bad sides of this payment scheme tend to pile up. In that sense, your finances will take a big hit and you might plummet into a really deep hole.
There are also good sides to this payment scheme. It really is a convenient way to make payments and transactions especially if you need to make a purchase for an expensive item that you didn’t budget for beforehand. After all, approval is practically on the spot and there are no crazy interest rates that would hamper your finances in the long run.
More importantly, buy now, pay later programs are helpful payment methods for those with bad credit. As mentioned, third-party financers hardly make background financial and credit checks before they approve of your application. That makes it easier for you to make a purchase even though you don’t have the money on you to make the transaction. It also means that, even if you have a really bad credit standing, you can still make non-cash transactions.
That said, interest-free finance works to your advantage if you know how to use it responsibly and if you are able to avoid the dangers that are associated with it. It can be pretty tempting to buy that high-tech television or that newly released sound system even though you never needed those things. Discretionary purchases are what makes buy now, pay later programs so dangerous because you are actually paying for something you didn’t need with money that was never even yours in the first place.
Statistics show that 40% of those using interest-free finance are students or are professionals working on part-time jobs. That means that they are either living off an allowance or are earning minimum pay. In that case, those types of consumers don’t even have the money to pay for their purchases or are simply struggling to keep up with repayments. It can be pretty difficult to forego buying those brand-new sneakers knowing that you can simply buy it and pay for it later. But, if you can control yourself and become a responsible buyer, then there is no need to worry about having to face the dangers that buy now, pay later programs can potentially cause.
14. Tips for using interest-free finance or by now, pay later programs
Knowing the pros and cons of buy now, pay later programs and knowing that it can still be of use to you if you have a bad credit standing, the next thing you should know is to how to use this kind of a payment scheme responsibly so that you wouldn’t fall into the endless trap of borrowing money over and over again to make repayments. That said, here are some tips that may be able to help you out in that regard:
15. Build up an emergency fund that could help buffer your spending
Credit facilities such as credit cards and buy now, pay later programs can be quite helpful especially if you are spending on emergency or if you really need to make a purchase or transaction such as buying a new refrigerator because your old one is broken beyond repair. In other words, you may have to spend for something you never thought you needed but just suddenly sprouted out of nowhere.
But the problem here is that you might not be able to pay for that item with your income no matter how much you needed it. That said, you really have to limit your credit purchases. One of the best ways of doing so is to build up an emergency fund. The purpose of doing so is to help you live within your limits and do live without relying on any credit-related transaction by allowing you to make emergency transactions with money that you already have. Set aside a few hundreds of dollars every now and then after you get your paycheck. It might not be much at first but it will tend to build up as long as you don’t touch it.
16. Decide if you really need to make that purchase
Before making that tempting purchase using buy now, pay later programs, don’t think twice. Instead, think thrice or as many times as you can. Consider your purchase and decide if you really need that item. Look at the pros and cons of making that risky investment instead of just buying out of pure whim or compulsion. That way, you can really tell if that item is worth using interest-free finance on. You already know the risks of using this payment scheme. Now, the only thing you need to know and decide is if that item is a necessity or if it will eventually help improve your finances in the long run (a new machine for a startup business, for example).
The other thing you also need to consider is your income. Decide if you can really afford to make repayments for that item. Even though it might be valuable or useful to you, the value might not be enough to outweigh having to pay for penalties and late fees if you happen to miss a repayment or two. No matter how good of an investment it is, using buy now, pay later programs to purchase it can still be risky if your income right now won’t be enough to make repayments on a consistent basis.
17. Keep track of your repayment schedule
Keep close track of your repayment schedule is important so that you would avoid incurring penalties and late fees. This kind of a payment scheme really is useful and convenient as long as you can keep up with your repayments on a regular basis. In that sense, it is important for you to keep track of the schedule and to monitor your bank account as well. Always keep a sufficient amount in your account a few days before repayment.
If you don’t have the money days before the repayment schedule, you may be able to avoid penalties by borrowing money from family or friends. It’s not a healthy practice but it is still better than having to incur expenses brought about by late fees. And even if you can’t help but miss a repayment schedule, it is important for you to make the repayment as soon as possible because penalties tend to grow the longer it takes for you to pay the right amount.
18. Avoid using credit cards to make repayments
There is nothing worse than paying for debt by using credit. You merely are adding fuel to the fire in this case because nominating a credit card for repayments can only lead to interest charges you were trying to avoid in the first place. You might be able to avoid penalties for late repayments in this case but will still be paying for it one way or another because of interest. Instead, nominate a debit account instead of a credit line as your way of making repayments.