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

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.

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).

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.

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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