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Networth and Chill with Your Rich BFF
Klarna, Affirm & Afterpay: What Your Buy Now, Pay Later Apps Aren't Telling You
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Don't say I didn't warn you. Lending money is a profitable business and companies like Klarna or Affirm make a lot from their short term interest free loans. I mean, just think about it. Something that used to cost you $400 now only costs 100. You get it today. Easy. Most people who are drawn to Buy Now Pay later are doing it because they can't afford the full purchase right now. Which is exactly when you shouldn't be buying it. They are staring down the abyss of an endless loan. What's up everyone? I'm your host Vivian Tu, AKA your rich BFF and your favorite Wall street girly. Buy Now Pay later it seems like this phrase is everywhere. You can put your phone upgrade on it, you can put your rent on it. 60% of Coachella goers paid for their tickets with Buy Now Pay later services in 2025. Hell, even DoorDash is partnering with Klarna, meaning you can even pay off your takeout sushi in four installments. It seems like Buy Now Pay later came out of nowhere and has taken over this country by storm. But when did Buy Now Pay later become so big? Is it really too good to be true? Well, today on Net Worth and Chill, I'll be explaining all of this and more, answering your questions about where this kind of short term loan came from, who stands to benefit from them, and if there are actually any good use cases for them. Support for Net Worth and Chill comes from Adobe. Planning your finances means taking a realistic picture of your life as it is now and where you want to be. But you also got to plan for the unexpected because life happens and you need to be able to edit, adapt and collaborate with others to reach your goals. Adobe gets that, which is why they made a tool that's just as flexible PDF spaces. In Acrobat, your PDF files are no longer static. Instead they're living documents that flex with you and your project's needs. Learn more@adobe.com do that with Acrobat let's get into the nitty gritty. First off, what is Buy Now Pay Later? At its very core, Buy Now Pay later services are payment options that let you split purchases into smaller interest free payments over time. You can think of it like any other kind of loan. It's just another way of borrowing money from someone and paying it back later. And the biggest players in the space are companies like Klonk, afterpay and Affirm. They're everywhere now, from online shopping to even big ticket stuff like weddings. Here's how they Work. Instead of paying the full amount of whatever you're trying to buy up front, you pay a portion at checkout and then make the remaining payments over a few weeks or months, usually without interest. If you pay on time, and that's a big if. It's basically like getting a mini loan for your purchase. Usually the repayment schedule can be split into four equal bi weekly installments, allowing you to get paid before the next bill hits. Unlike other kinds of loans, they also don't require credit checks and have quick approval processes at checkout. Of course, all these shiny features are exactly why so many people started using them. You can get what you want now without the full financial hit immediately. It's a short term interest free loan. If you're trying to buy a $100 jacket, it sounds a lot cheaper in your head if you say it's actually $25 per month for the next four months. I mean, half of shoppers aged 25 to 44 are using these services. So if you've ever been tempted to hit that Pay later button, you're definitely not alone. To actually understand why we have this, we gotta roll back the tape. So let's talk the historical origins. Even though it seems like this is a really new thing, Buy Now Pay later has also been around for a really long time. It started during the Great Depression when people were having a hard time making ends meet. Stores started offering layaway so shoppers could pay in installments to hold an item. You want to buy a sweater you can't afford, so you'd open a layaway plan. The sweater would be notated as spoken for. You'd pay for it over time, and once you finally paid the full amount, then you could take possession of the sweater. These programs largely disappeared in the 80s with the rise of credit cards. But now we have the worst of both worlds. With Buy Now Pay later, you can take possession of stuff today like you would with a credit card, so you feel little to no urgency to pay your debt back. But also, since it's more of a layaway plan, you don't get any of the benefits or protections of a credit card either. So how do these companies make money? Well, lending money is a profitable business. And companies like Klarna or A firm make a lot from their short term interest free loans. And not just from the interest and fees that they get from the late payers, but all of the money you owe them. That's just the child's play part. The way these companies are making their money is from the fees they're charging the merchants. So the companies that are selling you the goods you're buying online or in person, Buy Now Pay later companies are then charging those companies anywhere between 4 to 9.5%, according to NPR, which can be a lot higher than what credit cards usually charge, which is usually 2 to 4%. Merchants continue to offer Buy Now Pay later services because they bring in more sales more, whether it's new customers who are kind of suspicious of credit cards or people who have really bad credit. But as this industry continues to grow, I wouldn't be surprised if vendors start slowly sliding these costs over to us, the consumer. And that's never good. So why is Buy Now Pay later bad? Why is it problematic? As you're probably starting to realize as I'm explaining how this actually works, there is a huge amount of risk with these micro loan programs. Buy Now Pay later plans honestly only make you poorer in the long run. First, let's talk about the fact that it so often causes overspending because the purchase isn't actually cheaper, it just feels cheaper in the moment. Buy Now Pay later is designed to make consumers feel like they can buy things they normally wouldn't or couldn't afford. And this mentality is exactly what so often causes that overspending. Reporting shows that people often build unsustainable spending habits with Buy Now Pay later usage and can quickly accrue thousands of dollars in debt if they start falling behind on payments. I mean, just think about it. Something that used to cost you $400 now only costs 100. You get it today, easy, but you've basically forgotten that you still owe $300. And even though you aren't getting anything new in the next couple months, you're still going to owe that money. The CFPB also found that some users end up spending spending more than they normally would because the payments feel smaller and more manageable. One Buy Now Pay later loan, where you pay it off on time is entirely fine. But when you start taking out multiple from different companies with different payment schedules and different numbers, it can become easier and easier to mess up on a deadline. And then you're in a world of hurt. It's that classic death by a thousand paper cut situation where multiple small payments can add up fast. And that is the exact situation that a lot of people end up in. Almost a quarter of people using these loans made a late payment last year. So a fourth According to the Federal Reserve, as soon as you step out of line with a Buy Now Pay later plan, you could be facing both late fees and interest. That stacks up very quickly. In the best case scenario, you would buy something, pay it off when all the installments came due, and you would have no issues. But if you're even 1 nanosecond late on a payment, your interest goes from zero up to 35.99%, and then you're on the hook for much more than you're originally bargained for. That could be an even higher interest rate than most credit cards. That's how high it is. That's how people end up racking up thousands in debt with these Buy Now Pay later services. They think they'll be able to make the payments, but then something happens and they miss it. And all of a sudden they they are staring down the abyss of an endless loan. And that's not even the only reason I'm generally not a fan of these services. You also just sacrifice a lot in terms of consumer protection when you're shopping. Let's say that you ordered a $400 pair of shoes online and because they were a little out of your budget, you decided to go for a Buy Now Pay later plan. But when they arrived, you realized they don't even fit. They're a size too small if you want to return them. It's a little more complicated than just driving to the store and handing them back. Usually if the store accepts the return, the they'll notify the Buy Now Pay later lender and they'll process your refund either to your Buy Now Pay later account or your bank account. That takes way longer than standing there right in the moment and getting your refund straight from the retailer. And if the store only offers store credit for your return, you are still responsible for paying the Buy Now Pay later loan according to your original terms. So you're still on the hook to give your lender $400 on time. And now you just have $400 in store credit that you can use at some undisclosed later date that doesn't quite pay your bills. Using a Buy Now Pay later plan instead of paying straight with your credit card also means that you forego your rewards and other credit card benefits. Buy Now Pay later services typically don't have the same reward structure like credit cards have, so it's not like you're earning travel points or cash back on your shopping the same way you would with your credit card. Not to mention, credit cards also offer purchase protection. So if those aforementioned shoes get stolen off your front porch, you can always call your credit card and argue with them for a refund if the store is being annoying. Buy Now Pay Later Lenders don't care about all of that. If your shoes get stolen, that's between you and the universe, and you still have to pay your installments. And my last big gripe about Buy Now Pay later is that they might hurt your credit score. Yes, you heard me right. Some of these loans are now going to be reported to the credit bureaus. Historically, one of the main draws of Buy Now Pay later is that they weren't going to be reported, which means that it wouldn't affect your credit score score at all. But things have changed. A firm has been working with FICO to develop two credit score models that include Buy Now Pay later data, and they also started reporting its loan data to Experian and other credit bureaus last year. The Effect on Individuals credit scores will depend on whether they make their payments on time. In the obvious way, paying on time should help your credit, and missing payments could hurt it. This will be huge for young people who pay their loans on time and are trying to build their credit. But Klarna and afterpay are opting out of sharing their borrower data with the bureaus, meaning that your debt will still live in the phantom world. But if you responsibly pay off your installments, it won't help you build up your FICO score at all. But I don't want to just rag on Buy Now Pay later this entire episode. The quick thing that you should probably be wondering is, well, who should be using Buy Now Pay Later? The ideal Buy Now Pay later user would be someone who has rock solid budgeting skills, never misses payments, and is using it strategically for cash flow timing rather than affordability. Think someone who has the money sitting in their account but wants to keep it earning interest for a few extra weeks while making payments. Emergency situations might make sense, like if your laptop dies right before a big work deadline and you need it immediately, but your paycheck comes next week. But even then, putting it on a credit card often gives you more protections and more flexibility. Generally, I kind of feel as though the kind of person who should be using Buy Now Pay later wouldn't ever want or need to use it. Like if the ideal Buy Now Pay later candidate is someone who will be able to pay off their installments without a problem and quickly has the cash on hand, it would kind of just make more sense for them to save up and buy it in one fell swoop. Most people who are drawn to Buy Now Pay later are doing it because they can't afford the full purchase right now, which is exactly when you shouldn't be buying it. If you need to split a $200 purchase into four payments, that's usually your budget telling you to wait. So I do have a long list of people who I think should stay far, far away from Buy Now Pay Later. That's anyone who's already carrying debt, struggles with impulse purchases, or doesn't have a solid emergency fund. If you're already paying something off, stay away. If you don't actually need the thing you're considering putting on layaway, keep it moving. And please stop putting those Coachella tickets on afterpay and turn on YouTube at home. You are not prepared for how expensive Coachella can get if you can't even afford the ticket to get inside. Bottom line, if you're using Buy Now Pay later because you can't afford something outright, you're essentially borrowing against future income for discretionary spending. Don't say I didn't warn you. So what should you do instead? Well, first off, to put it bluntly, live within your means. Do not make purchases that you can't immediately afford. That said, a solid rewards credit card is probably your best bet. You get that same pay later flexibility since you do have until your statement due date to pay it, but you're actually building credit and earning rewards. Though the big tip here is the same as for Buy Now Pay later. You need to make your payments in full, on time every single month. Here is the ultimate strategy that actually builds wealth. Use your credit card for your normal spending. Pay the full balance every month and put those credit card rewards toward your financial goals. Some people even time big purchases with new card signup bonuses to maximize the benefit. This is things like bonus points or even straight up cash. In my case, I actually opened up a new travel credit card right before a bunch of the payments for my wedding were going to hit and and surprise surprise. Spending a bunch of money to get married allowed us to actually pay for our flights to our honeymoon in points. They were basically free. All I had to pay were taxes and fees. If you're worried about overspending, set up automatic payments and treat your credit card like a debit card. Only spend what you actually have in your checking account. You get all the benefits without the risk. As for true emergencies where you need more time, your emergency fund is way better than any payment plan. Although of course things happen and you might need to use one if you don't have the rainy day cash on hand. Your emergency fund has no fees, no missed payment risk, and you're not borrowing against future income. I recommend having three to six months of living expenses saved up in an emergency fund in case something happens because you never know and you just don't want to be caught out in a situation where you have to take on a bunch of risk. With something like Buy Now, Pay later, support for net worth and chill comes from Adobe. Things change, life happens, timelines shift, and your financial strategy. It has to be able to keep up and fit the current moment. So if you need to be flexible and adaptable, then the documents you use to keep track of it all should be too. That's where PDF Spaces from Adobe Acrobat comes in. With Acrobat, you can do so much more with a PDF file than you ever thought possible. PDF Spaces takes those documents and turns them into a living project you can edit, engage with, and collaborate with others on. You can even put all your files into one workspace and have a whole conversation with your AI assistant about it. Then you can ask questions to get deep insights about your project, all without leaving the PDF space. You can also invite people to your PDF space and let them add files, comments, notes, and more. You can brainstorm through sketches or even synthesize all the info in podcast form. That's right, Acrobat lets you generate an audio overview of your project in just one click. The world isn't static, and thanks to Acrobat, Neither are your PDFs. Learn more@adobe.com do that with Acrobat. And now onto our Q and A section. Let's get into these questions. Question number one Can I use Buy Now, Pay later services if I can't get approved for a credit card? The simple answer is yes, you can. However, something that I would really encourage you to consider is also a secured credit card. This is something like a Discover it secured you give them a deposit. So say you have $200. You give it to the credit card company that is offering you a secured credit card. That $200 deposit then becomes your entire credit limit. You want to just put small charges on that credit card for the time being and you want to spend less than 30% of that total credit limit. And but then by six months from now, your credit score should have improved meaningfully enough so that you can get a better credit card with better perks. Now, what I will say about Buy Now Pay later is that originally it was actually an incredibly thoughtful and optimistic idea. There were communities that were underbanked, so whether that be immigrants, communities of color, people who may be undocumented and don't have as much access to to be able to improve a credit score. They were able to use Buy Now Pay later services to make large purchases, things like a refrigerator or a new set of work tools or a new laptop. And that actually was a very good use case of Buy Now Pay Later. They were essentially using it similarly to how a credit card would be used. If that is something that you are considering, and especially if you are considering building your credit with Buy Now Pay later services, you can it isn't the end of the world, but I think these days there are other ways to build your credit and ultimately you will be better off having a credit card having a high credit score so that you can get those rewards. Next question. How much would you budget in your salary for a discretionary fun spending budget? I would personally base it off of the 503020 method. So this is where 50% of your take home pay, this is your pay after taxes goes towards needs. So that is housing, transportation, utilities, basic groceries. 30% goes towards wants. So that's quite a lot, right? That 30% includes fun spending, but it also includes other, I would say less fun but social obligations. So if you have to go to a friend's wedding or if you have to get people gifts for the holidays, that is in wants. Now the last 20% is you today taking care of future you. So so that is your debt pay down, that is your saving, that is your investing. While it's hard to pinpoint exactly how much of your budget you should spend for discretionary fund spending, overall your discretionary spending should be roughly 30%. Not all of it will be fun, some of it will feel obligatory. But it'll be good to have that 30% allocated and then you can partition part of that 30 just for you while the rest of it can go towards social obligations or other things. Next question. I missed a payment and now I owe way more. Any advice on the smartest moves to pay down this debt fast? Yes. First and foremost I would test the avalanche method. This would just be ranking your debt from highest to lowest interest rate. Like we talked about, certain Buy now pay later plans have higher interest rates than others. Some can go all the way up to 35.99. Others might be closer to 30, closer to 25. But you're going to rank your debt from highest to lowest interest rate. Make sure that any additional debt pay down funds you have towards paying down these debts go towards the debt with the highest interest rate first. That's going to Help you clear it while spending the least on interest. And this will give you the way to actually get your debt pay down in the fastest timeline. Now, there's another question that we're being asked. Can you get a personal loan for your Buy Now Pay later debt? Yes, you can. And that is called debt consolidation. So this answers this question, but also kind of the one before it. A personal loan is where you go to a financial institution and you say, hey, can I get a lump sum, some loan to essentially pay down existing debts? They will give you this lump sum loan. You can take this lump sum and you can put it towards all of your Buy now pay later debt and completely clear it. Now, the really important part here is you do not want to rack up any other Buy now pay later debt or any other credit card debt during this time. But now you can pay back the personal loan. And personal loans typically have interest rates ranging from 7 to 15% a year, which is much lower than something like a credit card or a Buy Now Pay later loan if you miss a payment. So yes, a personal loan is a great way to consolidate your debt, pay fewer fees, spend less on interest, and get your debt paid down in the fastest timeline. Next question. How can I monitor my credit score to see how my Buy now Pay later loans affect it? Well, this is a great question. What I encourage every single person to do is to go to annualcreditreport.com yes, this is a government sanctioned site. This is the only source for truly free credit reports authorized by federal law. And you are able to get your credit reports and see exactly what is contributing to the high score or the low score. But this is a great way to actually monitor and see what is improving your score and what is dinging it. So make sure to check that out. The URL is Annual Credit report dot com. Is it worse to put necessities, things like groceries, cleaning supplies, bills on Buy now, Pay later or a bigger one time purchase? So I think the question of worse is subjective. I think if you are putting necessities on Buy now Pay later, you're probably in a more financially desperate position than if it's just bigger one time purchases. That said, if you can avoid putting bigger one time purchases on on Buy now Pay later and are able to use something like a credit card that you can pay off in a month's time or even getting a personal loan from a bank, you are going to be likely in a better position. If you can try and be strategic and just make sure that you're not missing installments of your buy now pay later and you need to put necessities on it. I'm not going to sit here and tell you you can't do that because I do understand that we are in a very economically challenging time right now. Next question. With how much prices are going up, it's harder than ever to resist the temptation of buy now pay later. What tips do you have for smarter budgeting when it seems like everything is getting more expensive? 1000% true. Everything is very expensive right now. What I will say is when you have a discretionary purchase you want to make, building a sinking fund for it is probably a much more responsible way to get what you want than trying to buy it today, have it in your hand tomorrow, and pay for it over time. A sinking fund works like this. You set aside a set amount of money every single week, every single month, whatever. Over time you will be able to save up to what you want. So instead of trying to whip out hundreds of dollars for a new bag, maybe you set aside $10 a week. $10 a week for 52 weeks in a year is $520. You can buy the bag then. We as a society have completely lost the plot when it comes to delaying gratification. Everybody wants it now, everybody wants it yesterday. If you are able to delay that gratification, saving up for something is going to make that purchase feel so much better because you don't have to have spending guilds. And on top of that I would say if you are making necessary purchases like groceries, unfortunately there isn't an amazing tip I can give you. But when it comes to smarter budgeting, I would say using cash back apps like an Ibotta or a Rakuten to get money back on those purchases you do have to make making sure that if you do use a credit card you're getting cash back or travel rewards for for the money you're already spending. And then obviously last but not least, being smart in the grocery store, buying things that are store brand and generic. Splitting with another family to buy big box like bulk items from bulk retailers like a Costco or Sam's Club. There are so many strategies but I do fully understand that like necessities are getting more expensive and it's a real shame that people who work very hard and work a full time job don't feel like they can make ends meet. Next question is what are the actual fees and late payment interest rates for the different buy now pay later companies? Is one better than the other? So transparently they all have different fee and interest structures and they're all not the best. That said, they do differ. So a firm doesn't charge late fees. However, late payments can negatively impact your credit score. They have interest rates that can go up to 36% with Afterpay. If a payment's not made within 10 days of the due date, they charge you a late fee of $8. But late fees are capped at 25% of your total order value. For Klarna. Klarna may charge up to $7 if you miss the first payment as a late fee and then interest can range anywhere between 8 to 34%. Listen, these terms are subject to change. They might change by the time you're even listening to this. They are going to fluctuate as they try to compete with each other. The real takeaway here is whether it's a late fee, whether it's really high interest, whether it's whatever. If you miss a payment, you are going to have to pay. So don't miss a payment. And if you think you're going to miss a payment, don't use them. Another question. I need some dental work. Should I put it on credit, take a loan out or use Klarna? Yeah, it is very alarming to me. I feel like it's capitalism final boss that you can put dental work on Klarna. What I will say is that if you do need this dental work, more often than not, medical providers will actually provide you an interest free payment plan. So I would see if that's available to you first because interest free is always the best and they typically work with your timeline to pay it off. Alternatively, you could take out a lower interest rate personal loan like a 7 to 15% interest rate loan versus using something like a Klarna or a credit card which will charge you much higher interest rates if you cannot get it paid off within roughly a month or two's time. If you think you're going to need a longer timeline than that, I would look at loans from your dentist or just payment plans from your dentist or a personal loan versus using these functions. And last question, should I build up my emergency savings before paying off any more debt? It depends. Yes, it's really important to have your emergency savings built up. That said, it is also very scary to watch your credit card debt or your buy now pay later debt which is, you know, at 25 to 35% compound very quickly. So what I will say is this, build up an emergency savings fund just to have a little bit of buffer. Typically what I say is that your emergency fund should be three to six months of living expenses. If you have high interest rate debt that you're paying off, maybe just get your emergency fund to a thousand dollars and then start paying off that high interest rate debt because that is going to help you save on interest over time. It's a flexible, fluid situation. You don't want to be paying a bunch of interest. Having an emergency savings really does help people sleep better at night, myself included. At the end of the day, this is all you have to remember. If something sounds too good to be true, it probably is. Unsurprisingly, while the rich may own buy now, pay later stock, they aren't personally using the service while the general population that does use it to often fund both necessary and discretionary purchases probably shouldn't be that's all from me today, besties, but if you have any more questions for me, leave them down in the comments section. I'll see you next time. Thanks for tuning into this week's episode of Net Worth and Chill, part of the Vox Media Podcast network. If you like the episode, make sure to leave a rating and review and subscribe so you never miss an episode. Got a burning financial question that you want covered in a future episode? Write to us via podcastorrichbff.com follow net worth and Chill Pod on Instagram to stay up to date on all podcast related news, and you can follow me at yourrichbff for even more financial know how. See you next week. Bye. Support for Net Worth and Chill comes from Adobe. For a long time, turning something into a PDF kind of felt like creating a digitized fossil, like you were encasing all your grammar errors in resin for your whole team to see in perpetuity. But what if your PDF was alive? You could engage with it, collaborate through it, and ask it questions with the help of an AI assistant. You could even let your PDF talk to you by turning it into a podcast. 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