Buy Now, Regret Later? Decoding BNPL and Layaway Payment Plans

Summary

NerdWallet's Smart Money Podcast
Episode: Buy Now, Regret Later? Decoding BNPL and Layaway Payment Plans
Release Date: December 11, 2024

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Introduction

In this episode of NerdWallet's Smart Money Podcast, hosts Sean Piles and Anna Hilhoske delve into the evolving landscape of payment options available to shoppers during the holiday season. With the rise of online shopping, understanding the differences between traditional and modern payment methods becomes crucial. The discussion primarily focuses on two payment strategies: Layaway and Buy Now, Pay Later (BNPL). To provide expert insights, Lauren Schwan, a NerdWallet writer specializing in credit, debt, budgeting, and money, joins the conversation.

Understanding Layaway and Buy Now, Pay Later (BNPL)

Layaway is a time-tested method where consumers make a down payment on a desired item and pay the remaining balance over a set period. The retailer holds the item until the full payment is completed. In contrast, Buy Now, Pay Later (BNPL) is a newer, rapidly growing online payment option that allows shoppers to split the cost of purchases into equal installments. With BNPL, consumers receive the purchased item immediately after making the first payment at checkout.

Lauren Schwan explains, “[Layaway] typically is where you make a down payment on a purchase and pay the remaining amount over time. The retailer holds that item until you finish paying for it” (03:00), whereas BNPL enables immediate ownership with extended payment plans (03:00).

Benefits of Layaway vs. Buy Now, Pay Later

Layaway offers several advantages:

• Debt-Free Purchasing: Unlike loans, layaway doesn't require consumers to incur debt, eliminating the need for credit checks.
• No Credit Impact: Successful completion of layaway payments neither affects nor builds credit scores.

BNPL, on the other hand, provides:

• Immediate Access: Shoppers receive their items right away without waiting until full payment is made.
• Flexibility: Many BNPL plans offer no or low interest, making them financially appealing.
• Wide Availability: BNPL options are more prevalent across various retailers compared to layaway.

Lauren highlights these points, stating, “One benefit of layaway is that it's not a loan, so you aren't required to take on debt to make the purchase... The big benefit of Buy Now Pay later is that you don't have to wait to get the item” (04:11).

Risks and Drawbacks

While both payment options offer flexibility, they come with potential risks:

• Layaway:

  • Missed Payments: Failure to complete payments may result in losing the item and possibly paying cancellation fees.
  • No Credit Building: Layaway payments are not reported to credit bureaus, offering no benefit to credit scores.

• BNPL:

  • Credit Risks: Late payments can lead to fees, interest charges, and negative credit reporting, potentially harming credit scores.
  • Debt Accumulation: The ease of multiple BNPL plans can lead to overextension of financial obligations.

Lauren warns, “Buy Now Pay later has, I think, a bigger risk of hurting your credit. If you have late payments, the account might eventually be charged off... or it might be sent to a debt collector” (07:42).

Comparison with Credit Cards

Both Layaway and BNPL offer alternatives to using credit cards by allowing payment over time without immediate full payment. However, they differ significantly:

• Interest and Fees: Credit cards typically charge interest on unpaid balances, whereas layaway and BNPL often involve no or lower interest rates.
• Credit Building: Responsible use of credit cards can help build credit scores, a benefit not provided by layaway and most BNPL plans.
• Rewards and Perks: Credit cards often offer cash back, points, or other rewards, which are absent in layaway and BNPL options.

Lauren elaborates, “Credit cards also help you spread out the cost of a purchase... Layaway and Buy Now Pay later... won't help you build credit” (05:24).

Choosing the Best Option for You

When deciding between BNPL, Credit Cards, and Layaway, shoppers should consider the following factors:

1. Urgency of the Purchase: If immediate access to the item is essential, BNPL is preferable over layaway.
2. Financial Stability: Assess the ability to meet payment schedules without incurring additional fees or debt.
3. Credit Goals: For those aiming to build credit, credit cards might be the better choice.
4. Cost Comparison: Evaluate the total cost, including any potential fees or interest associated with each payment method.

Lauren suggests, “If it's something you need right now, then you can rule out layaway because you have to wait for that” (09:24) and advises careful comparison of fees and interest rates (09:24).

Tips for Safe Shopping During the Holiday Season

Lauren offers several practical tips for consumers navigating payment options:

• Read Terms Carefully: Understand all conditions associated with layaway or BNPL plans to avoid unexpected fees.
• Track Payment Due Dates: Use reminders or automatic payments to ensure timely payments and avoid penalties.
• Explore Alternatives: Consider less expensive options or secondhand purchases to fulfill needs without financing.

She emphasizes, “Emphasize again how important it is to Read the details carefully if you're considering a layaway or buy now, pay later plan” (11:16).

Conclusion

The episode wraps up with Lauren reinforcing the importance of informed decision-making when choosing payment plans. By understanding the nuances between layaway, BNPL, and credit cards, consumers can better manage their finances and avoid potential pitfalls during the holiday shopping frenzy.

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Money Headlines

Following the main discussion, the podcast briefly covers recent financial news:

1. Labor Department Jobs Report: November saw an addition of 227,000 jobs, a significant increase from October, despite a slight rise in the unemployment rate from 4.1% to 4.2% (13:24).

2. CFPB Legal Ruling: The Consumer Financial Protection Bureau is returning $1.8 billion in junk fees to consumers affected by credit repair companies like Lexington Law and CreditRepair.com following a court ruling on unethical fee practices (13:36).

3. Investor Behavior Insights: A Wall Street Journal study reveals that increased market timing among mutual fund investors since the pandemic has cost investors approximately 1% of their portfolio value annually, highlighting the risks of attempting to predict market movements (14:45).

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Final Thoughts

This episode of Smart Money Podcast offers valuable insights into modern and traditional payment methods, equipping listeners with the knowledge to make savvy financial decisions during the bustling holiday season. By understanding the benefits and risks associated with layaway and BNPL, consumers can navigate their purchases with greater confidence and financial prudence.

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Notable Quotes with Timestamps:

• “One benefit of layaway is that it's not a loan, so you aren't required to take on debt to make the purchase.” – Lauren Schwan (04:11)

• “Buy Now Pay later has, I think, a bigger risk of hurting your credit.” – Lauren Schwan (07:42)

• “Emphasize again how important it is to Read the details carefully if you're considering a layaway or buy now, pay later plan.” – Lauren Schwan (11:16)

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For more insights and detailed analyses, subscribe to NerdWallet's Smart Money Podcast on your favorite platform.

Transcript

[Cody]

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[Sean Piles]

Welcome to Nerd Wallet's Smart Money podcast. I'm Sean Piles.

[Anna Hilhoske]

And I'm Anna Hilhoske.

[Sean Piles]

And this is our weekly Money news roundup where we break down the latest in the world of finance to help you be smarter with your money. We'll go deep into a single topic, then leave you with the latest money headlines. The holiday shopping season is well underway, but we have a feeling there are a few stragglers out there.

[Anna Hilhoske]

Guilty.

[Sean Piles]

Me too. So today we're talking about the tools shoppers afford to make big purchases and the potential risks involved.

[Anna Hilhoske]

We'll be diving into two ways that shoppers break up the costs of one big purchase into multiple smaller payments. The old school way is called layaway, and it's been around since the Great Depression. The new school way is called Buy Now, Pay later or bnpl, and it's a rapidly rising online payment method that's gaining popularity among Gen Z. Adobe analytics expects shoppers during this holiday season to spend roughly 11% more using BNPL than they did a year ago.

[Sean Piles]

Here to walk us through both payment options is Lauren Schwan, a writer at NerdWallet who covers credit, debt, budgeting, and money. Lauren, thanks for being here today.

[Lauren Schwan]

No problem.

[Sean Piles]

Let's hit the basics first. What is layaway and what is bnpl?

[Lauren Schwan]

Layaway typically is where you make a down payment on a purchase and pay the remaining amount over time. The retailer holds that item until you finish paying for it. Buy Now Pay later is a loan that splits the cost of the purchase into a series of equal payments, and you make the first one at checkout. With Buy Now Pay later, you get the item immediately after that first payment. You don't have to wait until the full balance is paid.

[Anna Hilhoske]

How long does it take to pay off a layaway purchase versus a Buy Now Pay later one? And when do you actually get the item that you're financing?

[Lauren Schwan]

That depends on the terms of the specific plan that you sign up for layaway purchases. Those usually take a few weeks to a few months to pay off, and you get the item whenever you make that last payment. Buy Now Pay later purchases can take a few weeks, months, or even years to pay off. Usually the most popular plans follow what's called a Pay in four model, and that's where the total cost is divided into four installments due every two weeks, and they're typically paid off in about six weeks time. With Buy Now Pay later though, you still get the item that you're purchasing right after checking out, regardless of how long the repayment period lasts.

[Sean Piles]

What are some of the benefits of using layaway vs buy now pay later and vice versa?

[Lauren Schwan]

One benefit of layaway is that it's not a loan, so you aren't required to take on debt to make the purchase. You don't need a credit check to get on a layaway plan, and there's no direct effect on your credit if you can't complete the layaway payments. It's just that you won't get the item and you may have to pay a fee, but it's not going to go to a debt collector or anything. The big benefit of Buy Now Pay later is that you don't have to wait to get the item. It's yours right away. You don't have to pay the full price first. Depending on the plan, you may not have to pay any fees or interest charges. Another advantage is that Buy Now Pay later plans are more widely available than.

[Sean Piles]

Layaway plans, and those advantages that you just listed of Buy Now Pay later can also be what make them risky, but we'll get into that in a little bit. How does either option differ from just using a credit card to make a purchase?

[Lauren Schwan]

Credit cards also help you spread out the cost of a purchase, but most will charge interest on your unpaid balances. With Layaway and Buy Now Pay later, you'll either pay no or low interest in most cases. But unlike credit cards on time, Layaway and Buy Now Pay later payments aren't reported to the credit bureau, so they won't help you build credit. But by using layaway or Buy Now Pay later shoppers may also miss out on the cash back and rewards that most credit cards offer.

[Anna Hilhoske]

So now that I think about it, layaway isn't something I see offered very often. Now I'm going to age myself, but when I was a kid I remember holiday commercials from department stores that specifically advertise layaway as an option. In this day and age, how do you find layaway?

[Lauren Schwan]

You're right, layaway was a lot more common decades ago, and there have been some periods of resurgence more recently. Amazon had a layaway option actually just earlier this year, but most of these plans have been phased out in favor of Buy Now Pay Later. These things are more likely to find layaway at businesses like local furniture stores, jewelers and pawn shops instead of the big name retailers and department stores. Some larger companies still do offer it, or they might sometimes bring it back just for a short period of time, especially around the holidays. So if you are interested in using layaway as you're doing your holiday shopping, keep an eye out for information from those retailers when you're browsing their websites.

[Sean Piles]

And meanwhile, it seems like Buy Now Pay later offerings from providers like Klarna, Affirm or afterpay are popping up pretty regularly when I'm checking out online. Are there certain types of retailers that tend to offer BNPL as opposed to others?

[Lauren Schwan]

Yeah, honestly, you can find it just about everywhere now, but especially those big box stores and retailers that specialize in things like apparel, electronics, beauty and home goods.

[Sean Piles]

As Ana mentioned at the top, Buy Now Pay later is becoming popular with Gen Z. A recent payment survey showed that 68.5% of Gen Z respondents were likely to use BNPL this holiday shopping season. Lauren, any insights as to why this is catching on with younger shoppers.

[Lauren Schwan]

I think part of it could be that this generation, like many folks right now, is feeling the sting of the high cost of living and many gen zers are young adults. You know, those late teens and early twenties and they may not have established credit or as high of an income as some people in older generations might. I think BNPL is appealing because in most cases it doesn't require a hard credit check and it can be easier to qualify for than a credit card. Also, credit card purchases can be more expensive if you don't make the payments on time because of the interest, so no or low interest Buy now pay later plans might seem like the more financially friendly option Lauren let's talk about.

[Anna Hilhoske]

The potential drawbacks of layaway and BNPL because neither is risk free. Can either one impact your credit?

[Lauren Schwan]

A layaway plan is not going to directly impact your credit, for better or worse. These plans, as we mentioned, don't require credit checks, so there won't be a hard inquiry on your credit report and your score won't take a hit. The payments also don't get reported to the credit bureaus whether they're on time or not, so using layaway responsibly isn't going to help you build credit. But there's kind of a catch if you use a credit card to make layaway payments that could indirectly impact your credit since credit card payments are reported. So if you make them, it could help build your credit, but if you miss them, it could also knock your credit. Most Buy Now Pay later plans similarly don't require a hard credit check or report the on time payments to the credit bureaus. Some will report positive payments or they might allow you to opt into that feature. So there is a chance those could help build your credit history, but it's not guaranteed. Buy Now Pay later has, I think, a bigger risk of hurting your credit. If you have late payments, the account might eventually be charged off, which means it's written off as a loss. Or it might be sent to a debt collector, which could be reported to the credit bureaus, ending your credit.

[Sean Piles]

Are there any fees or penalties with layaway or Buy Now Pay later if you can't afford payments?

[Lauren Schwan]

It depends on the plan, but that's why it's really important that you read the terms carefully first. With layaway there could be a cancellation fee, or there might not be a fee at all, but in either case you wouldn't get the item if you don't finish making payments. Some BNPLs charge fees or interest for things like rescheduled or late payments, especially the longer term plans. And there's also that risk of a negative mark showing up on your credit reports.

[Anna Hilhoske]

So let's assume that all three options are available when you're trying to make a purchase. BNPL Credit Card and Layaway how can shoppers figure out the best option for them?

[Lauren Schwan]

One thing to think about is how urgently you need the item. If it's something you need right now, then you can rule out layaway because you have to wait for that. But you can also compare fees and interest rates to get a better sense for how much each option may cost you, especially if you can't pay on time. If you're trying to build credit, a credit card is probably going to be the best option for that. But I would also say consider whether none of these three options are the right choice. If you can't afford the item and it's not something you absolutely need, you probably shouldn't buy it.

[Sean Piles]

I like the idea of asking yourself how urgently you need an item for another reason too. It could prevent you from buying something that you truly do not need and cannot afford. And I think that is the big risk with Buy Now Pay later versus something like layaway. Even QVC is doing Buy Now Pay later now. I mean I was admittedly hate watching it the other day and they had a number of products that you could buy for four installments of $6. It's easy to see how folks could rack up multiple Buy now pay later loans, have a hard time keeping track of them, and then maybe end up in a position where they can't afford all of these different loans they have scattered about.

[Lauren Schwan]

Absolutely. Buy Now Pay later is becoming so much more widespread to your point for purchases big and small. The other day I went to a bakery in my neighborhood and saw that they accept afterpay, which surprised me.

[Sean Piles]

Wow, must be some expensive bread there.

[Lauren Schwan]

Yeah, so I think it's safest for people to not have more than one Buy now Pay later loan at a time. But if someone is going to use them more frequently, setting due date reminders can be a huge help or even setting up automatic payments. If you do use autopay, it's really important to make sure you'll have the money when payment comes due so that you don't risk getting charged something like an overdraft fee or interest, depending on your payment method.

[Sean Piles]

Lauren, any final tips for shoppers this season? When it comes to choosing payment options or finding ways to save, I would.

[Lauren Schwan]

Emphasize again how important it is to Read the details carefully if you're considering a layaway or buy now, pay later plan just to make sure that you understand what you're getting yourself into. If you choose one of these plans, keep track of the payment due dates. And also, I think there's something to be said if you really want something but you can't afford it without financing, explore cheaper options first. There might be a less expensive dupe of the item. You know, something that looks the same but isn't, maybe from as high end of a brand or maybe you could find something secondhand. There are local buy nothing groups you can join on Facebook and other sites where people often give away or trade some really great stuff. And a lot of retailers also sell open box items at a discount. There's a lot of creative ways to save money around the holidays.

[Sean Piles]

Lauren, thanks so much for being here.

[Lauren Schwan]

Thanks for having me.

[Sean Piles]

Up next, a few money headlines in the last few days. Today's episode is supported by Range Rover Sport. You know, some vehicles are built for performance, some for luxury and some for adventure. But the Range Rover Sport, it's built for all three. It's the Swiss army knife of cars, except way more comfortable and without the tiny scissors. With its powerful design and sporting luxury, it isn't just a vehicle, it's your statement of intent. It's built to deliver smooth, composed handling with adaptive dynamics which reduces unwanted body movements so even the twistiest roads feel like a breeze. And for those days when the road is more dirt than asphalt, adaptive road cruise control has your back adjusting seamlessly to changing terrain. On top of all that, the Range Rover Sport's dynamic air suspension gives you maximum agility, control and support. So if you're ready to elevate your drive and leave the drama for your destination, head to land RoverUSA.com build your perfect range Rover Sport and get ready to lead every journey in style@land roverusa.com all right, Ana, it's time for the all important monthly jobs report. And it was a bang up number for November.

[Anna Hilhoske]

Yeah, the Labor Department reported that the economy added 227,000 jobs last month. That was a significant increase over the October jobs figures, which were hurt by hurricanes and the Boeing strike.

[Sean Piles]

Wages rose too, with hourly earnings ticking up 0.4%. The unemployment rate, though, also rose from 4.1% to 4.2%.

[Anna Hilhoske]

This is one of those data points that will factor in when the Federal Reserve's Open Market Committee meets next week to discuss what's next for interest rates. The Consumer Financial Protection Bureau announced that it's returning $1.8 billion in junk fees to consumers who use credit repair companies. The agency says that more than 4 million people will receive payments for being charged advance fees or being subjected to bait and switch advertising by lexington law and creditrepair.com this is part of a.

[Sean Piles]

Legal ruling by a judge back in August of last year that said the companies had violated laws against collecting fees before achieving promised results for consumers. Basically, they were charging money before actually doing the job.

[Anna Hilhoske]

After the court ruling, both companies filed for Chapter 11 bankruptcy protection. The CFPB says affected consumers will get payments in the next few weeks without having to do anything.

[Sean Piles]

And finally today, the Wall Street Journal did some digging and came up with a really interesting finding about investor behavior since the onset of the pandemic. Turns out ana that individuals with investments in mutual funds increased their efforts to do something called market timing.

[Anna Hilhoske]

Oh, this rarely turns out well. To review market timing is when investors try to predict what's happening in the stock markets and buy and sell based on those predictions. They're typically trying to time their decisions to buy low and sell high, of course, but more often than not, that's a fool's errand.

[Sean Piles]

Researchers at the Journal took a bunch of information on the trading of various mutual funds and came up with an estimate that the increase in this behavior costs investors, investors who were trying to time the market roughly 1% off the value of their portfolios. That is nearly double the amount lost due to poor market timing between 2015 and 2019. In other words, they did not time their buying and selling well, and they certainly didn't do better than if they had just held onto those mutual funds over a longer span of time.

[Anna Hilhoske]

And they found that this behavior got worse and worse from 2020 to this year. It makes some sense because a we all had a bit more time on our hands for a while there and b there was crazy stuff going on with things like the Gamestop meme stock hype and its successors. So maybe just don't try to time the markets.

[Sean Piles]

Yeah, it rarely works out. If you're looking for ways to invest your money that aren't so risky, then you might want to check out NerdWallet's write up of the best ways to invest your money right now. You can find a link to that in today's show notes or just search for best ways to invest. That's it for this week's Money News. We always welcome your money questions and comments. Turn to the nerds and call or text us your questions at 901. That's 901-730-nerd. Or send us a voice [e-mail] and remember, you can follow the show on your favorite podcast app, including Spotify, Apple Podcasts, and iHeartRadio to automatically download new episodes.

[Anna Hilhoske]

Today's episode was produced by Tess Viglin and myself and edited by Rick vanderkneuf.

[Sean Piles]

Here's our brief disclaimer. We are not financial or investment advantage advisors. This nerdy info is provided for general educational and entertainment purposes and may not apply to your specific circumstances.

[Anna Hilhoske]

And with that said, until next time, turn to the nerds.

[Tess Viglin]

Today's episode is supported by amazfit. For those who crave adventure as part of their lifestyle, but don't let it define them, meet The Amazfit T Rex 3 the Ultimate Ready for Anything adventure Watch. Whether you're hitting the trails or saying yes to that spontaneous night skiing invite, the amazfit t rex3 is ready for it all. It's more than just a smartwatch. It's your personal guide to exploration, discovery and the thrill of the unknown. Adventure is calling and it's time to answer with the amazfit T Rex 3. I've been testing out the Amazfit T Rex 3 and it is jam packed with features. It has an ultra long battery life that lasts for 27 days. When I wake up, it hits me with a rundown that includes the day's weather forecast and upcoming schedule, along with my readiness score, which basically tells me if that extra episode of TV last night was worth it. Plus, you can download extra apps like fitness tools and meditation timers for when my adventure is just surviving a stressful Monday. AMAZFIT is trusted by 42 million users and their devices are available at major retailers including Best Buy, Target, Walmart and Amazon. But as a smart money listener, you can get 15% off your next purchase on Amazfit's website. Using promo code smartmoney. Just visit us.Amazon.com smartmoney that's us.Amazon.com smartmoney and enter promo code smartmoney to get your next smart, wearable.