Afterpay and New Financing Methods
It's no secret that retailers are always trying to think of new and creative ways to get us through the doors. Many of them know that getting us in the store is half of the battle and that once we're inside, the odds of us buying something (even something we don't need) skyrockets exponentially. Now that we're in the digital age, it's easier than ever for businesses to get us "inside." Sometimes it seems like the entire internet is just one big store designed to get us to buy, buy buy.
As a matter of fact, just about anyone can set up an online store. Pretty much all you would need to start a store is a pre-built website and an idea. According to Kommando Tech, there were roughly 1.3 billion online retailers in 2020. With all that competition, retailers have to accept different payment methods to have as much of an edge as possible. It seems like every time I'm checking out online, I get a notification that I'm eligible for Afterpay or another new financing method. There's no shortage of online financing options either. Afterpay is arguably one of the most popular, and for that reason, I'll be using it a lot as an example throughout this post!
If you're unfamiliar, Afterpay and others like it are types of payment methods that you can use on sites across the web. Specifically, they're ways to finance purchases over more extended periods instead of paying in full upfront. As an example, Afterpay's slogan is "Shop Now, Pay Later." With a lot of these platforms, you'll be able to apply and get a decision in just a few minutes. To repay, most offer financing anywhere between two and six months, but some can be financed over multiple years.
These online financiers often boast that you won't have to pay extra, which is an enticing thought. It isn't quite that simple, however. There's no service in existence that's one hundred percent free. Everyone has to get paid somehow. Most of the time, financing companies similar to Afterpay rely on high late payment or default fees. While they often make payments seem light-hearted, fun, and easy, you'll be held fully liable by a contract you've digitally signed should you be unable to pay for whatever reason.
Pros/Cons of Using Afterpay and Similar Services
Getting What You Want When You Want It. This is obviously the big drawing point of companies like Afterpay. They really draw us in by appealing to our want for instant gratification. We get to have that amazing iPhone 12 or whatever the latest (expensive) gadget is right this second, and we get to make small payments on it instead of paying for it all at once!
Not Using Credit Cards. While financing online can be expensive, and I wouldn't necessarily recommend it, it's can sometimes be a better option than putting large purchases on credit cards. Either way, you'll be making monthly payments on whatever you bought, but at least with online financiers, you'll be paying little to no interest as long as you make your payments on time. Read the details and weigh your options before making the commitment.
Potential Interest Charges. Be careful when signing up to use an online repayment methods that you're not going to be paying out the wazoo in interest. Interest can be a dangerous game that can come back to bite you!
Late Fees. Life happens, and sometimes that means money situations change. One thing I dislike about repayment is that you're taking on a longer amount of risk. The longer the period is that you're making monthly or bimonthly installments, the higher the chance of an unforeseen event affecting your money situation (like job loss, injury, etc.).
Unwittingly Adding to Debt. Here's one of the biggest dangers of using an online repayment method. You could be racking up a ton of debt while not realizing it because your monthly payments are low. If you're using something like Afterpay, it's imperative to keep track of exactly how much debt you have, who it's owed to, and how quickly you'll have to repay it.
Legally Bound. While it may seem like common sense, it's worth mentioning that all of these repayment options are legally binding. When you apply to them and accept their terms of service, you're digitally signing a legally binding contract stating that you will make x payments on time for x amount of months/weeks until your debt and interest are wholly paid off.
If you're going to use an online repayment or financing option like Afterpay, it's essential that you have a plan to repay the money you're borrowing before you accept and use any money from them. If you don't, you could find yourself in a very precarious situation. You never want to be put in a position where you have to decide between making a payment on your iPhone and feeding yourself or your family.
While online retailers and their zero interest repayment options are very enticing, they can also be pretty risky. Don't forget, there IS another option. Creating and regularly contributing to a savings account can be a great way to save up large purchases. It's also intrinsically rewarding to save and make a large payment-in-full, and it'll help you really enjoy the moment when you get whatever particular thing you're saving for!
If you're considering using an online repayment method or an online financier, consider speaking with a financial professional. It could be well worth the time to have a sit-down conversation about your personal finances with someone like me who can help you see how your money is and should be allocated. If you're interested in talking or coming up with a personal budget that will help you save for big purchases, please call or email to schedule an appointment with me. I'll work with you to create a financial plan and retirement plan built personally for you.
Until next time...this is Melissa Making Cents!
Melissa Anne Cox, CERTIFIED FINANCIAL PLANNER™, is also a College Planning and Student Loan Advisor and Financial Coach in Dallas, Texas.