The 'Buy Now Pay Later' Trap, Explained

Why is paying for so addictive? I

literally once financed a bottle of body

wash.

You know what? I'm going to afterpay

this. It's going to make me feel less

guilty to pay it in four installments of

$81 or whatever. That's like having a

black American Express to me. I can use

it anywhere, anytime I get ready. I'm

using CLA to pay for these Chris Brown

tickets. Look at this chart right here.

This shows the total non-housing

consumer debt in America over the last

10 years. And in 2024, Americans

collectively owe more than $5 trillion

which is enough to pay for every NFL

NBA, and MLB team 10 times over. And to

make matters worse, we are constantly

surrounded by psychological tricks and

hidden fees to drive us further and

further into debt. The worst of these

tricks, the buy now pay later programs

that have been designed to take

advantage of young adults. So, when you

buy a $100 pair of shoes and you only

have to pay $25 that day and then the

pair of shoes show up at my apartment 3

days later, the shoes are $25. Why do I

care if in 2 months I have to pay

another $25? I don't know me 2 months

from now. She can deal with that. I now

pay later is a short-term financing

option that is offered by companies like

Affirm, CLA, or Afterpay. You'll

typically see these options pop up on

e-commerce stores, offering you the

ability to buy what you want today while

deferring your payment over a certain

number of installments. So, if you're

looking to buy a new suitcase for a trip

you have coming up, and it's going to

cost you $300, instead of paying that

all today, you could buy the suitcase

today and then split the $300 across

four equal interest free payments. And

you might think, great, interest free. I

can just sign up for these payments and

then worry about paying it sometime

later down the road. But it's not quite

that simple. These buy now pay later

programs aren't necessarily

groundbreaking financial technology. In

fact, buy now pay later programs are

kind of a newer modernized version of

the old school layaway programs that you

would see at stores like Kmart and

Sears. These layaway programs allowed

you to place a deposit on an item like a

dishwasher, for example. And then the

store would reserve that dishwasher for

you to collect once you had paid off the

dishwasher through their installment

plan. But these layaway programs kind of

fell off throughout much of the midentth

century, mainly due to the introduction

of credit cards and revolving lines of

credit. Instead of using a layaway

program and waiting to collect their

item, people could just swipe a credit

card, get their item today, and then

worry about paying off that over the

next couple months or years. The only

problem is is that a credit card will

incur interest. People realized that if

they didn't pay their credit card down

on time, they would end up owing more

than they initially spent on the item.

So along came the modern marvel that is

buy now pay later which gave you the

best of both worlds. Get your product

today, pay it off over a longer period

of time, all while doing it interest

free. And that idea began hooking people

in because buy now pay later has seen

some explosive growth over the last 5

years going from $2 billion in

transaction volume in 2019 to $24.2

billion in 2021. And it's projected to

reach as high as $122 billion in 2025.

But this explosion wasn't just happening

in a vacuum. It's actually part of three

major cultural shifts that we've been

seeing. First is the financialization of

everything, meaning we've moved from a

completely cashbased society to a

society in which we look at even a $5

coffee as an opportunity to finance the

transaction. Second, we have the rise of

social mediadriven consumption. As

influencers showcase luxury lifestyle

and products, buy now pay later allows

the average consumer the ability to

experience those same things without

actually incurring the cost today. And

third, we have the post-pandemic

spending boom, which has consumers using

buy now pay later as a form of revenge

spending or buying things they feel like

they missed out on during the pandemic.

Combine all of that with a declining

financial literacy among most young

adults, and you have the perfect storm

to make buy now pay later explode as a

new mentality. But why is this even a

problem? If they're not charging

interest, how can they actually be

taking advantage of me as a consumer? To

answer that question, we first need to

look at the differences between buy now

pay later programs and traditional

credit cards. Because on the outside

they're basically the same thing. Both

financial devices allow you to buy

something today that you might not

necessarily be able to afford or be

willing to put cash down today for. But

a credit card usually involves some sort

of approval process, application

review, and a credit report hit.

Meanwhile, buy now pay later programs

offer an almost instantaneous approval

for your purchase in the moment.

Additionally, as we discussed, credit

cards can acrue interest if not paid off

by the end of the month. And that rate

can be at crazy high rates, usually

around 19 to 23%. On top of that, if

you're late with your payment or you

miss a payment, credit card companies

can also add on late payment fees that

just end up waterfalling you into insane

amounts of credit card debt off of

fairly simple purchases to begin with.

And on the other hand, buy now pay later

offers 0% interest, which sounds great

but that all depends on if you actually

pay your payments on time. If you don't

you'll be subject to late payment fees

that can range anywhere from $2 to $15

per payment and going all the way up to

25% of the total value of the purchase

you made initially. And with all that

said, buy now pay later still might

sound like a perfectly good alternative

to credit cards, which is exactly what

they want you to think because buy now

pay later programs weren't necessarily

designed to help the consumer like you

or me. They were designed for stores and

brands that want to sell more through

their website or in their stores. After

all, that's why brands are willing to

pay 2 to 3% more for their transaction

fees to use a buy now pay later program

versus a traditional credit card

processor. To give you an example, let's

look at a $100 purchase. If you bought a

$100 item using a normal credit card on

their site, the brand was typically

going to incur about a $2.50 charge to

process that payment. And on the other

hand, if you were to use a buy now pay

later program, that transaction fee that

the brand has to pay goes from $2.50 to

about $5. But the merchant fees are just

the beginning when it comes to buy now

pay later. So let's look at how these

companies actually make money beyond

just charging the brand that hosts them

on their website. First, like we just

discussed, they're going to collect that

merchant fee, which is anywhere from 4

to 6% of the transaction price. Second

they profit from late fees like we

talked about earlier, which has turned

out to be a pretty substantial revenue

source for companies like Affirm and CLA

because one in every three users of

these buy now pay later programs

actually ends up missing a payment at

least once. And third, every purchase

that is made reveals something about you

or your shopping habits. And these

companies have realized that that is

very valuable information for other

brands. So they actually harvest a lot

of the data from your checkout pages and

then sell it to other brands that can

then use it in their marketing or in

their ad target. And finally, they

benefit from the sheer volume of loans

being opened up. By packaging yours and

everybody else's debt together and

selling it to larger financial

institutions, they can make money even

when you pay on time. In other words

they've created a system where they win

no matter what happens to you

financially. So, now let's look at

buying an iPhone for $1,000. When you

reach the checkout page, you have three

options. Number one, pay the full $1,000

upfront. This is the simplest, cleanest

and easiest way to get out of the

checkout scotch-free. Option two, you

could use a credit card with the typical

22% APR to purchase the phone. And if

you only made the minimum payments, you

would end up paying about

$1,480 over the course of 5 years with

$480 of that being the interest alone.

And option number three is you could use

Afterpay's for payment installment plan

where you pay $250 today and then $250

every 2 weeks until the plan is paid

off. Which sounds like the best deal to

you? You see, brands have mastered

psychological manipulation throughout

their website, but specifically on the

last hurdle, which is the checkout page.

And they do this through four key

tricks. First, they exploit what

psychologists call the pain of paying.

By splitting the cost over a longer

period of time, your brain actually

registers less financial pain than

paying the full amount up front. Second

they trigger what is called the temporal

discounting, which is our tendency to

value immediate rewards more than future

benefits or otherwise known as instant

gratification. Pay just $25 today and

it's yours sounds a lot better than

waiting and saving up for it. Third

they will create artificial urgency by

simulating limited time offers in the

checkout page. And finally, they use

colors and shapes to direct your eye

exactly where they want you to be

looking. Have you ever noticed that the

buy now pay later button is often

highlighted in a brighter color? And

it's sometimes even pre-selected when

you reach the checkout page. These

aren't accidents. These are specific

design decisions to shortcircuit your

brain to making a financial decision

more on an impulse than with rational

thinking. Instead of thinking about a

$100 purchase rationally and over a

longer period of time, they'd rather

have you just click the pay $25 now and

worry about it later on. And again, this

isn't necessarily a bad deal because

people are always looking for interestf

free ways of purchasing things so that

their money can go and earn them more

money while they're paying off the other

thing that they purchased. But to do so

requires some financial education or

experience. And sadly, most Americans

are completely undereducated when it

comes to financial literacy. So the

instant gratification syndrome kicks in

and they buy practically everything with

buy now pay later with no real concern

that they will in fact have to pay that

off at some point. All they're worried

about is the price that they will pay

today which is exactly how you end up

with this. I've done groceries. I've

done all kinds of crap on a firm and

cla but it adds up and then you are in a

chokeold and in some ways it is worse

than having credit card payments. It's

crazy because buy now pay later is so

easy to do. People are starting to use

it on more and more occasions where it's

really not meant to be used. Instead of

just using it on a big purchase like a

new fridge or a TV, they're starting to

use it on smaller things and truly

financing items that have no business

being financed. A crazy story that we

recently saw is that CLA is now on Door

Dash, which allows you to finance your

$15 burrito over four payments of $375

instead of paying the full $15 upfront.

Again, not a necessarily terrible thing

when looked at in a vacuum. But when you

expand this to consider that someone

who's financing a burrito is also

probably financing a lot of other

things, that's when the real problem

starts to arise. Bad spending habits

like this lead to what we call loan

stacking. Pretty much what it sounds

like. Taking out loan after loan after

loan and stacking them on top of each

other. And because buy now pay later

programs make it so easy to do so, most

consumers don't even realize how much

debt they're actually acrewing. In fact

in 2022, 63% of buy now pay later

borrowers had more than one loan going

at one time. And this is where it gets

really scary because these programs are

designed to offer credit with little to

no approval process. It's almost like

they're targeting people that don't know

how to manage their money. All they see

is, "Oh, I can buy this $1,000 thing for

$250 today." And they just click buy.

When in reality, over 69% of buy now pay

later users are already in debt on

another credit card. And 28% of buy now

pay later borrowers are between the ages

of 18 and 24 years old. Most of these

people don't even understand the concept

of how a credit card works. And by

giving them this buy now pay later

option, it's almost like they have this

unlimited stream of money that never

needs to actually be paid off. Again

don't get me wrong, there are definitely

some advantages to the system if you

know how to play it. But the vast

majority of people using the system are

not taking advantage of it. They are

just getting taken advantage of. So what

do you do as a consumer? Should I

completely stay away from buy now pay

later or are there some circumstances

where it makes sense? And to answer that

question, the most important piece of

advice I can give you is to never spend

more than you currently have. Whether

that be through a credit card or a buy

now pay later option. If you don't have

the cash in your bank, don't spend it.

And that is by far the easiest way that

you can keep yourself out of credit card

debt. And if you feel confident in your

financial abilities, feel free to use a

credit card or a buy now pay later

option to earn more interest on your

cash while it's sitting in your account

versus just spending it immediately. But

if you don't feel confident about this

treat your credit cards in a buy now pay

later program as if it's hooked directly

up to your checking account. If you

spend $100, that's $100 coming directly

out of your account. Another tip I have

is to avoid stacking these loans because

that is where things can get very messy

very quickly. If you start financing

weekly expenses like gas, groceries, or

that Friday night Chipotle bowl, it

becomes a slippery slope because it is

100 times easier to get into debt than

it is to get out of debt. But there you

have it, the truth about buy now pay

later. These companies spend millions of

dollars on psychological research to get

you to spend more than you can actually

afford. But now you know a little bit

more about how to protect yourself. And

if you like this video, make sure to

check out this video that covers the

business of Formula 1 and how

billionaires use debt to fund their

crazy hobby of racing.

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