Holiday shopping? How the new ‘buy now, pay later’ options affect your brain

In this excerpt from her new book Money Like You Mean It, Global News money reporter Erica Alini discusses what consumers should know about the new buy now, pay later apps and services that have become popular in Canada during the pandemic.

Micropayments are a newer addition to the varied microcosm of debt, and they’re spreading fast. As tiny as they may be, do not underestimate them. Confused about what the heck I’m saying? I’m talking about the new incarnation of the buy-now, pay-later (BNPL) system.

This isn’t a new idea of course. If you’ve ever bought a mattress or a laundry machine, you’ve probably come across this scheme: Get the thing now and don’t pay for six months interest-free! What we should do with that, of course, is figure out whether we can afford to pay off the bill in full within the fateful six months. If so, it’s a sweet deal: pay for a big-ticket item in smaller installments at zero additional cost. But what our impressionable brain often does instead is think it’s getting something for free right now; forget about the bill for six months; and then, when the bill comes due, curse itself for having to shell out a ton of money plus interest for something that no longer feels new.

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Much like using a credit card, BNPL separates the pain of paying from the actual purchase, says Mariel Beasley of Duke University’s Common Cents Lab. “There’s something super powerful about ‘free today.’” This age-old offer also takes advantage of our natural inclination to discount what’s going to happen in the future, she says. As animals, we’re hard-wired to worry about the present much more than about what’s to come. The prospect of a big charge coming down the pike in six months is much less likely to deter us from a purchase than if we had to fork out the money right away.

Micropayments have taken all this to the next level. The grandchildren of the classic BNPL system are online services and apps that let you split small purchases into tiny installment payments. You may have started to notice these offers at checkout when you’re buying something on the web. You can pay for that $150 pair of shoes in one go, or you can make three monthly payments of $50.
BNPL 2.0 has been around for a while in the U.S., but in Canada it really took off during the pandemic, with consumers largely limited to online shopping and many retailers pivoting to digital sales overnight.

Proponents of the new BNPL say it’s way better than using a credit card. The payments come out of your account automatically, which means there’s no danger of incurring extra interest charges as you would if you didn’t pay off the full balance on your credit card. But when you have the option of paying in tiny installments, your brain tends to zero in on the smaller dollar amount of the monthly charge rather than the total cost, something behavioural economists call anchoring.

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On the other hand, when you pay with plastic, you are still looking at the full cost of a purchase. Sure, you can put off paying it off in full, but the price tag on which you’re basing your buying decision is the full amount. This forces you to think about whether whatever you’ve got your eye on is really worth the cost. “There is still at least a little bit of pain in thinking, ‘Is this purchase worth $235, even though I won’t have to pay it today?’” Beasley says. “Whereas these smaller fixed installments — these micropayments — essentially what they’re doing is they’re anchoring you on ‘You can get this item for $47.’”

Micropayment can be a better option for something you were going to buy no matter what. But for anything else, they likely make it easier to overspend because they refocus your attention on the smaller installment payment rather than the bigger, overall number, Beasley says.

Be aware that BNPL apps may collect fees and interest. Also, in some cases you can set the payments to be charged to your credit card, which eliminates any advantage of using installments instead of paying with plastic. Finally, with some BNPL micropayment options, you may be signing up for a miniature loan, which could affect your credit score.

If you’re thinking of taking advantage of micropayments, here are some things to consider:

  • What should you do when you discover you can get a fabulous $235 pair of jeans for just $47 a month with five monthly installments? You should stop, breathe, and do the math. Can you really afford to drop $235 on jeans?
  • Okay, so maybe you did treat yourself to those designer jeans — because you could afford them (and good for you; splurging when you know you can feels great). But now you’re looking at new headphones. They cost $300, but you can pay $50 a month. Fifty bucks a month doesn’t seem too bad, but remember, you’re still paying off the jeans. If you add the headphones, you’ll be out $97 a month. You get the point: micropayments are a slippery slope.

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