Is "buy now pay later" beneficial for consumer? (the four interest-free payments)

Question

Recently, I listened to the podcast episode "Buy now, pay dearly" from Planet money about how companies offer an option to let you pay for a product with 4 interest-free payments.

They explain that due to pure service of established debit companies and broader audience reach, it's appealing for companies to pay higher percent for "4 interest-free" service (9% instead of 4 - 5%).

As companies are paying higher service fees, they probably would cover it with higher product prices (to let consumer cover the expenses).

My question is - as the price already includes expense for "4 interest-free" payments service and inflation is not zero from month to month, is it more beneficial for me to buy with 4 payments or still stick to one? Are there any other risks/factors which are playing against me?

Answer 1

Companies attract new customers in several different ways. Each of these has a cost. They can buy expensive advertising, for example. Or they can have a sale where the items temporarily cost less. Interest-free loans are just another one of these tools to get you to buy an item you otherwise wouldn't.

Unlike, say, watching an ad, it's possible that paying a lower price or getting an interest-free loan has some benefit to you, but if you get that benefit only by buying something you shouldn't have, then overall the exchange is not beneficial to you.

So, imagine you want to buy a table. You see one you like for $1000 and other you like for $2000 but you can make 4 interest-free payments of $500 for that one, so you don't need the whole price right now. Assuming the tables are of equal quality and worth the same to you, clearly buying the second one is not your best choice. On the other hand, if you find two tables you like equally for the same price, and one comes with an interest-free loan option and the other doesn't, then using that loan is beneficial to you because you can do something else with some of your money for a while, and didn't pay extra to get that.

If you want the table (or car or whatever) no matter what and the issue is only "should I pay the whole thing now or use their scheme?" then yes, there are some things to look into. Some of these places are very sneaky and try to trick you into paying a high interest. They may be unclear about when the payment dates are, and if you're late you owe a large amount of interest from the beginning of the loan. They may charge service fees each month which are technically not interest. And so on. Depending on where you live, laws may protect you from some of this. At a minimum you must read the terms and conditions very carefully.

If you're only going to save (or earn elsewhere on the money you don't have to spend right away) 5 or 10 dollars, it's probably not worth the careful reading and other mental work involved in not being ripped off: just buy the item. But if it's a 3-year car loan, take the time to read it all. There's every possibility the company is simply spending money to get customers, and this can be to your benefit if the product is valuable to you.

Answer 2

A couple of thoughts to tie in some of the aspects of your question:

The only way inflation plays a part is if, instead of paying the full purchase price upfront, you pay for other expenses that would otherwise be delayed and cost more later. There aren't many scenarios that I can think of where this would be materially beneficial - the vast majority of consumer costs are either fixed (housing, streaming/cable, etc.) or on-demand (e.g. you don't "pre-pay" for gas, groceries, utilities, etc.).

Also, since consumer prices on individual items do not change continuously with "inflation", which is a must broader average measure, there are probably very few cases where you can use "inflation" to your benefit in this way.

One scenario that would be beneficial would be to take the delayed payments and use them to pay down debt (especially revolving debt). Then you would "save" the interest by paying it down earlier. But, unless you have extremely high-interest debt (in which case you probably shouldn't be buying things that require payment anyway) the benefit is likely marginal.

So, yes it can be beneficial to use a "0%" payment plan, but the difference is so marginal that you may be better off paying a cheaper price upfront somewhere else rather then trying to play the credit game.