Can Pay Later Apps Help or Hinder Your Finances: Addressing the Pros and Cons

Late FeesFirmBee / Pixabay

Buy now, pay later offerings continue to be a growing trend in the “next-gen” consumer financing sector. And, while this specialized line of credit is very attractive to people who want to hold on to their cash a little longer, or at least wait until their next pay day to settle their bill – there are a number of industry experts now saying that consumers need to pause, and take into consideration all of the factors involved with tapping into this type of e-commerce solution before jumping in. Indeed, late fees are only one issue potentially facing consumers in this area.

It’s no doubt that pay later tools and all sorts of digital transactions continue to be on the rise. In fact, a Worldpay report unveiled that ecommerce transactions, including things like credit cards, e-wallets and pay later services, are expected to surpass USD 4.6 trillion globally by 2022, with close to 140 online payment methods currently in use today.  Moreover, in the U.S. 30% of consumers now have some sort of buy now pay later account indicating the growing interest and consumer demand for these types of services.

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The Psychological Impact on The Consumer

But what kind of psychological influence can these after-pay technologies have on the everyday consumer? Well, it’s no surprise that the emotional appeal of being able to enjoy a product now, without having to pay the full price for it upfront can be quite enticing to many. People want what they want, when they want it (even if they can’t afford it). As such, pay later accounts are able to satisfy the desire for immediate gratification, while delaying the inevitable fact that the bill still needs to be paid at the end of the grace period.

Pay later can also mentally sway people into actually feeling like they have more spending power than they truly have. So instead of putting just one item on a pay later account, they eagerly put six or seven items on their “invoice” feeling a sense of freedom to spend as much as they want. This can obviously lead to overspending and racking up a much larger than anticipated bill at the end of their shopping spree.

Personal finance guidelines

“That’s why it’s always important to think before you click, swipe, spend or buy anything as this will help you avoid emotional triggers that make you want to buy more, and avoid impulse shopping for things that you don’t need,” said Norm Champ, former SEC official and private fund lawyer who recently penned a new book entitled, "Mastering Money: How to Beat Debt, Build Wealth, and Be Prepared for Any Financial Crisis”.

Norm goes on to share a major insight from his book, “We only think of the word governor as being a political position, however, this word also refers to a device that measures and regulates the speed of an engine. Unfortunately, too many Americans have lost their inner governor when it comes to spending, particularly click-and-buy spending online. This is why we have to take back control over our appetite for spending.”

Now on the other hand, some say for those who have a strong “inner governor” and some mental toughness, pay later options, if used wisely and with financial discipline, may actually benefit certain consumers. This all depends on their current financial well-being, and, on which pay later option they choose that will mitigate any late fees or high interest rates.

Late fees and other considerations

Not all pay later options are created equal so it’s important to understand all of the terms and conditions before signing on the dotted line, especially if you want to avoid accumulating more consumer debt, late fees or higher interest rates than anticipated.

Below are some of the commonly recognized forms of pay later options being offered in the marketplace.

Interest-free Pay Later platforms: Allows you to get your items now, and then spread out your payments over time via installments, rather than pay for it in full upfront.  Most interest-free platforms require that the retailer pay an interest fee or a transaction fee, so the customer doesn’t have to. However, this option can still cause shoppers to spend more than they can afford, and it can also still come with late fees and other credit implications that spenders need to be aware of.

Consumer credit: In this option the consumer is able to gain store credit on the spot. The consumer is still able to spread out their payments, similar to a credit card, and the consumer has to pay any interest and/or late fees.

With any of the options above, it’s always important for the consumer to read the fine print to understand the Pros and The Cons, which may include…

The Pros: You can avoid late fees

  • You Are Already Financially Disciplined. For those who are very conscious consumers, and who are willing to vet through options that don’t trap them into hidden fees, then a well-thought out pay later accounts could work. Especially on major purchases in which they are not fully ready to commit to buying the item outright.
  • No Fees for the Customer, Just the Merchant/Retailer. If the account is paid off in full, and within the service terms and agreement, the consumer can use the pay later service without incurring any interest rates or late fees (depending on the service of course). This may give a slight advantage over credit card spending in some cases.
  • Return Items You Don’t Like Without Costs. For some pay later accounts, you can get the goods now, try them out, then if you don’t like it you can actually return it and not be charged anything at all. For online clothing retailers, this allows their customers to enjoy a fitting room experience at home, and then just ship back any items they don’t like without any costs or any fees at all. Most items have to be returned within a 30-day period.

The Cons: You may pay some late fees

  • How Much Time to Pay Off the account. Some pay later options require that you pay off your bill in a short time frame like 30 days, while others may give you 3-months or longer.
  • Late Fees. Most of the pay later options, including the interest-free ones, come with late fees. As such, be sure to understand the cost of your late fees up front before you decide to sign up.
  • Interest Fees: Some pay later options come with interest fees up front, others may have interest fees kick-in later after three months or more. Even interest-free accounts may charge you interest later on if you run late on your payments. Be sure you understand all of the rules up front so you can make a wise financial decision. Most of these offerings are linked to credit cards and so after the “free” installment period, you get charged interest, which can be very high.
  • Payment Frequency Varies: Be sure to see if your service requires weekly, bi-weekly or monthly payments. This will help you determine if you will have the funds to make timely payments without incurring late fees.
  • Credit Report. Some pay later products are still seen as a type of loan and may be recorded on your credit history. So be sure to make payments on time and/or opt not to sign up for the service at all if you don’t want it to lower your credit score.
  • You Already Have A Lot of Debt. If you already lack financial discipline then it is not wise to do pay later accounts at all. Only buy what you need, and when you can afford it. Moreover, only spend what you know you have available on hand in your bank account.

Avoid debt from the start

Remember, “Debt begets more debt,” says Norm. “Therefore, if your expenses exceed your income, the only ways to fund that gap are either drawing on savings or incurring more debt. Unfortunately, many Americans opt to incur debt, but adding more debt increases your interest costs and puts more financial pressure on you. Of course, no one wants to be in this situation.”

The good news is financial freedom may be closer than you think. By adopting better spending and saving habits, by learning to live within your means, and by learning what and what not to buy as we all brace ourselves for this new digital financing era – you cannot only be financially fit for today, but more importantly, you can enjoy financial peace for the future.

Click here learn more about ways to beat debt or to get a copy of Norm’s latest book entitled, "Mastering Money: How to Beat Debt, Build Wealth, and Be Prepared for Any Financial Crisis”.

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About the Author

Adam Friedman, Financial Relations Consultant
As the principal of Adam Friedman Associates, founded in 1999, Adam has over 30 years of experience in all aspects of communications. Adam has extensive experience in the financial sector; in particular, he has been involved in M&A transactions, IPOs, crisis communications and restructurings. Adam has represented Fortune 500 companies as well as startups. He holds an M.A. from New York University and an MBA from the Baruch School of Business. He has been published in numerous periodicals and is currently an adjunct assistant professor at NYU, where he teaches crisis communications, public affairs and integrated marketing.

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