The 'Buy Now Pay Later' Trap, Explained — Transcript

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1. 0:00Why is paying for so addictive? I
2. 0:03literally once financed a bottle of body
3. 0:05wash.
4. 0:08You know what? I'm going to afterpay
5. 0:09this. It's going to make me feel less
6. 0:10guilty to pay it in four installments of
7. 0:14$81 or whatever. That's like having a
8. 0:15black American Express to me. I can use
9. 0:17it anywhere, anytime I get ready. I'm
10. 0:20using CLA to pay for these Chris Brown
11. 0:22tickets. Look at this chart right here.
12. 0:24This shows the total non-housing
13. 0:26consumer debt in America over the last
14. 0:2810 years. And in 2024, Americans
15. 0:30collectively owe more than $5 trillion,
16. 0:33which is enough to pay for every NFL,
17. 0:36NBA, and MLB team 10 times over. And to
18. 0:39make matters worse, we are constantly
19. 0:41surrounded by psychological tricks and
20. 0:43hidden fees to drive us further and
21. 0:45further into debt. The worst of these
22. 0:47tricks, the buy now pay later programs
23. 0:49that have been designed to take
24. 0:51advantage of young adults. So, when you
25. 0:53buy a $100 pair of shoes and you only
26. 0:55have to pay $25 that day and then the
27. 0:58pair of shoes show up at my apartment 3
28. 0:59days later, the shoes are $25. Why do I
29. 1:03care if in 2 months I have to pay
30. 1:04another $25? I don't know me 2 months
31. 1:07from now. She can deal with that. I now
32. 1:08pay later is a short-term financing
33. 1:10option that is offered by companies like
34. 1:12Affirm, CLA, or Afterpay. You'll
35. 1:15typically see these options pop up on
36. 1:16e-commerce stores, offering you the
37. 1:18ability to buy what you want today while
38. 1:20deferring your payment over a certain
39. 1:22number of installments. So, if you're
40. 1:23looking to buy a new suitcase for a trip
41. 1:25you have coming up, and it's going to
42. 1:26cost you $300, instead of paying that
43. 1:28all today, you could buy the suitcase
44. 1:30today and then split the $300 across
45. 1:32four equal interest free payments. And
46. 1:35you might think, great, interest free. I
47. 1:37can just sign up for these payments and
48. 1:38then worry about paying it sometime
49. 1:39later down the road. But it's not quite
50. 1:41that simple. These buy now pay later
51. 1:43programs aren't necessarily
52. 1:45groundbreaking financial technology. In
53. 1:47fact, buy now pay later programs are
54. 1:49kind of a newer modernized version of
55. 1:51the old school layaway programs that you
56. 1:53would see at stores like Kmart and
57. 1:55Sears. These layaway programs allowed
58. 1:56you to place a deposit on an item like a
59. 1:58dishwasher, for example. And then the
60. 2:00store would reserve that dishwasher for
61. 2:02you to collect once you had paid off the
62. 2:04dishwasher through their installment
63. 2:05plan. But these layaway programs kind of
64. 2:07fell off throughout much of the midentth
65. 2:09century, mainly due to the introduction
66. 2:11of credit cards and revolving lines of
67. 2:13credit. Instead of using a layaway
68. 2:14program and waiting to collect their
69. 2:16item, people could just swipe a credit
70. 2:17card, get their item today, and then
71. 2:19worry about paying off that over the
72. 2:21next couple months or years. The only
73. 2:23problem is is that a credit card will
74. 2:24incur interest. People realized that if
75. 2:26they didn't pay their credit card down
76. 2:28on time, they would end up owing more
77. 2:29than they initially spent on the item.
78. 2:31So along came the modern marvel that is
79. 2:34buy now pay later which gave you the
80. 2:36best of both worlds. Get your product
81. 2:38today, pay it off over a longer period
82. 2:40of time, all while doing it interest
83. 2:42free. And that idea began hooking people
84. 2:44in because buy now pay later has seen
85. 2:46some explosive growth over the last 5
86. 2:48years going from $2 billion in
87. 2:50transaction volume in 2019 to $24.2
88. 2:53billion in 2021. And it's projected to
89. 2:55reach as high as $122 billion in 2025.
90. 2:59But this explosion wasn't just happening
91. 3:00in a vacuum. It's actually part of three
92. 3:02major cultural shifts that we've been
93. 3:04seeing. First is the financialization of
94. 3:07everything, meaning we've moved from a
95. 3:09completely cashbased society to a
96. 3:11society in which we look at even a $5
97. 3:13coffee as an opportunity to finance the
98. 3:15transaction. Second, we have the rise of
99. 3:17social mediadriven consumption. As
100. 3:19influencers showcase luxury lifestyle
101. 3:21and products, buy now pay later allows
102. 3:23the average consumer the ability to
103. 3:25experience those same things without
104. 3:27actually incurring the cost today. And
105. 3:29third, we have the post-pandemic
106. 3:31spending boom, which has consumers using
107. 3:33buy now pay later as a form of revenge
108. 3:35spending or buying things they feel like
109. 3:36they missed out on during the pandemic.
110. 3:38Combine all of that with a declining
111. 3:40financial literacy among most young
112. 3:42adults, and you have the perfect storm
113. 3:44to make buy now pay later explode as a
114. 3:46new mentality. But why is this even a
115. 3:48problem? If they're not charging
116. 3:50interest, how can they actually be
117. 3:51taking advantage of me as a consumer? To
118. 3:54answer that question, we first need to
119. 3:55look at the differences between buy now
120. 3:57pay later programs and traditional
121. 3:58credit cards. Because on the outside,
122. 4:00they're basically the same thing. Both
123. 4:01financial devices allow you to buy
124. 4:02something today that you might not
125. 4:04necessarily be able to afford or be
126. 4:06willing to put cash down today for. But
127. 4:08a credit card usually involves some sort
128. 4:10of approval process, application,
129. 4:13review, and a credit report hit.
130. 4:15Meanwhile, buy now pay later programs
131. 4:17offer an almost instantaneous approval
132. 4:19for your purchase in the moment.
133. 4:20Additionally, as we discussed, credit
134. 4:22cards can acrue interest if not paid off
135. 4:24by the end of the month. And that rate
136. 4:25can be at crazy high rates, usually
137. 4:27around 19 to 23%. On top of that, if
138. 4:30you're late with your payment or you
139. 4:32miss a payment, credit card companies
140. 4:33can also add on late payment fees that
141. 4:35just end up waterfalling you into insane
142. 4:38amounts of credit card debt off of
143. 4:39fairly simple purchases to begin with.
144. 4:41And on the other hand, buy now pay later
145. 4:43offers 0% interest, which sounds great,
146. 4:45but that all depends on if you actually
147. 4:47pay your payments on time. If you don't,
148. 4:49you'll be subject to late payment fees
149. 4:51that can range anywhere from $2 to $15
150. 4:53per payment and going all the way up to
151. 4:5525% of the total value of the purchase
152. 4:58you made initially. And with all that
153. 5:00said, buy now pay later still might
154. 5:01sound like a perfectly good alternative
155. 5:03to credit cards, which is exactly what
156. 5:05they want you to think because buy now
157. 5:06pay later programs weren't necessarily
158. 5:08designed to help the consumer like you
159. 5:10or me. They were designed for stores and
160. 5:12brands that want to sell more through
161. 5:13their website or in their stores. After
162. 5:15all, that's why brands are willing to
163. 5:16pay 2 to 3% more for their transaction
164. 5:19fees to use a buy now pay later program
165. 5:21versus a traditional credit card
166. 5:22processor. To give you an example, let's
167. 5:24look at a $100 purchase. If you bought a
168. 5:26$100 item using a normal credit card on
169. 5:28their site, the brand was typically
170. 5:29going to incur about a $2.50 charge to
171. 5:32process that payment. And on the other
172. 5:34hand, if you were to use a buy now pay
173. 5:36later program, that transaction fee that
174. 5:38the brand has to pay goes from $2.50 to
175. 5:40about $5. But the merchant fees are just
176. 5:43the beginning when it comes to buy now
177. 5:44pay later. So let's look at how these
178. 5:46companies actually make money beyond
179. 5:47just charging the brand that hosts them
180. 5:49on their website. First, like we just
181. 5:51discussed, they're going to collect that
182. 5:52merchant fee, which is anywhere from 4
183. 5:53to 6% of the transaction price. Second,
184. 5:56they profit from late fees like we
185. 5:58talked about earlier, which has turned
186. 5:59out to be a pretty substantial revenue
187. 6:01source for companies like Affirm and CLA
188. 6:03because one in every three users of
189. 6:05these buy now pay later programs
190. 6:06actually ends up missing a payment at
191. 6:08least once. And third, every purchase
192. 6:10that is made reveals something about you
193. 6:12or your shopping habits. And these
194. 6:14companies have realized that that is
195. 6:15very valuable information for other
196. 6:16brands. So they actually harvest a lot
197. 6:18of the data from your checkout pages and
198. 6:20then sell it to other brands that can
199. 6:21then use it in their marketing or in
200. 6:23their ad target. And finally, they
201. 6:24benefit from the sheer volume of loans
202. 6:27being opened up. By packaging yours and
203. 6:29everybody else's debt together and
204. 6:30selling it to larger financial
205. 6:32institutions, they can make money even
206. 6:34when you pay on time. In other words,
207. 6:35they've created a system where they win
208. 6:37no matter what happens to you
209. 6:39financially. So, now let's look at
210. 6:40buying an iPhone for $1,000. When you
211. 6:43reach the checkout page, you have three
212. 6:44options. Number one, pay the full $1,000
213. 6:47upfront. This is the simplest, cleanest,
214. 6:49and easiest way to get out of the
215. 6:51checkout scotch-free. Option two, you
216. 6:52could use a credit card with the typical
217. 6:5422% APR to purchase the phone. And if
218. 6:57you only made the minimum payments, you
219. 6:58would end up paying about
220. 7:00$1,480 over the course of 5 years with
221. 7:03$480 of that being the interest alone.
222. 7:05And option number three is you could use
223. 7:07Afterpay's for payment installment plan
224. 7:09where you pay $250 today and then $250
225. 7:12every 2 weeks until the plan is paid
226. 7:14off. Which sounds like the best deal to
227. 7:16you? You see, brands have mastered
228. 7:17psychological manipulation throughout
229. 7:19their website, but specifically on the
230. 7:22last hurdle, which is the checkout page.
231. 7:24And they do this through four key
232. 7:26tricks. First, they exploit what
233. 7:27psychologists call the pain of paying.
234. 7:30By splitting the cost over a longer
235. 7:31period of time, your brain actually
236. 7:33registers less financial pain than
237. 7:35paying the full amount up front. Second,
238. 7:37they trigger what is called the temporal
239. 7:39discounting, which is our tendency to
240. 7:41value immediate rewards more than future
241. 7:44benefits or otherwise known as instant
242. 7:46gratification. Pay just $25 today and
243. 7:48it's yours sounds a lot better than
244. 7:49waiting and saving up for it. Third,
245. 7:51they will create artificial urgency by
246. 7:53simulating limited time offers in the
247. 7:55checkout page. And finally, they use
248. 7:57colors and shapes to direct your eye
249. 7:59exactly where they want you to be
250. 8:01looking. Have you ever noticed that the
251. 8:02buy now pay later button is often
252. 8:04highlighted in a brighter color? And
253. 8:05it's sometimes even pre-selected when
254. 8:07you reach the checkout page. These
255. 8:08aren't accidents. These are specific
256. 8:10design decisions to shortcircuit your
257. 8:12brain to making a financial decision
258. 8:14more on an impulse than with rational
259. 8:16thinking. Instead of thinking about a
260. 8:17$100 purchase rationally and over a
261. 8:19longer period of time, they'd rather
262. 8:21have you just click the pay $25 now and
263. 8:23worry about it later on. And again, this
264. 8:25isn't necessarily a bad deal because
265. 8:28people are always looking for interestf
266. 8:30free ways of purchasing things so that
267. 8:32their money can go and earn them more
268. 8:33money while they're paying off the other
269. 8:35thing that they purchased. But to do so
270. 8:37requires some financial education or
271. 8:39experience. And sadly, most Americans
272. 8:41are completely undereducated when it
273. 8:43comes to financial literacy. So the
274. 8:45instant gratification syndrome kicks in
275. 8:47and they buy practically everything with
276. 8:49buy now pay later with no real concern
277. 8:51that they will in fact have to pay that
278. 8:54off at some point. All they're worried
279. 8:55about is the price that they will pay
280. 8:56today which is exactly how you end up
281. 8:58with this. I've done groceries. I've
282. 9:00done all kinds of crap on a firm and
283. 9:02cla but it adds up and then you are in a
284. 9:06chokeold and in some ways it is worse
285. 9:09than having credit card payments. It's
286. 9:12crazy because buy now pay later is so
287. 9:14easy to do. People are starting to use
288. 9:16it on more and more occasions where it's
289. 9:18really not meant to be used. Instead of
290. 9:20just using it on a big purchase like a
291. 9:22new fridge or a TV, they're starting to
292. 9:24use it on smaller things and truly
293. 9:26financing items that have no business
294. 9:29being financed. A crazy story that we
295. 9:31recently saw is that CLA is now on Door
296. 9:33Dash, which allows you to finance your
297. 9:35$15 burrito over four payments of $375
298. 9:38instead of paying the full $15 upfront.
299. 9:41Again, not a necessarily terrible thing
300. 9:43when looked at in a vacuum. But when you
301. 9:45expand this to consider that someone
302. 9:47who's financing a burrito is also
303. 9:49probably financing a lot of other
304. 9:50things, that's when the real problem
305. 9:52starts to arise. Bad spending habits
306. 9:54like this lead to what we call loan
307. 9:56stacking. Pretty much what it sounds
308. 9:57like. Taking out loan after loan after
309. 9:59loan and stacking them on top of each
310. 10:01other. And because buy now pay later
311. 10:02programs make it so easy to do so, most
312. 10:05consumers don't even realize how much
313. 10:07debt they're actually acrewing. In fact,
314. 10:08in 2022, 63% of buy now pay later
315. 10:12borrowers had more than one loan going
316. 10:14at one time. And this is where it gets
317. 10:16really scary because these programs are
318. 10:17designed to offer credit with little to
319. 10:19no approval process. It's almost like
320. 10:21they're targeting people that don't know
321. 10:22how to manage their money. All they see
322. 10:24is, "Oh, I can buy this $1,000 thing for
323. 10:26$250 today." And they just click buy.
324. 10:28When in reality, over 69% of buy now pay
325. 10:32later users are already in debt on
326. 10:34another credit card. And 28% of buy now
327. 10:36pay later borrowers are between the ages
328. 10:38of 18 and 24 years old. Most of these
329. 10:41people don't even understand the concept
330. 10:42of how a credit card works. And by
331. 10:44giving them this buy now pay later
332. 10:45option, it's almost like they have this
333. 10:47unlimited stream of money that never
334. 10:49needs to actually be paid off. Again,
335. 10:50don't get me wrong, there are definitely
336. 10:52some advantages to the system if you
337. 10:54know how to play it. But the vast
338. 10:55majority of people using the system are
339. 10:57not taking advantage of it. They are
340. 10:58just getting taken advantage of. So what
341. 11:00do you do as a consumer? Should I
342. 11:02completely stay away from buy now pay
343. 11:04later or are there some circumstances
344. 11:05where it makes sense? And to answer that
345. 11:07question, the most important piece of
346. 11:08advice I can give you is to never spend
347. 11:11more than you currently have. Whether
348. 11:13that be through a credit card or a buy
349. 11:14now pay later option. If you don't have
350. 11:16the cash in your bank, don't spend it.
351. 11:18And that is by far the easiest way that
352. 11:20you can keep yourself out of credit card
353. 11:21debt. And if you feel confident in your
354. 11:22financial abilities, feel free to use a
355. 11:24credit card or a buy now pay later
356. 11:25option to earn more interest on your
357. 11:27cash while it's sitting in your account
358. 11:28versus just spending it immediately. But
359. 11:30if you don't feel confident about this,
360. 11:32treat your credit cards in a buy now pay
361. 11:33later program as if it's hooked directly
362. 11:35up to your checking account. If you
363. 11:36spend $100, that's $100 coming directly
364. 11:39out of your account. Another tip I have
365. 11:40is to avoid stacking these loans because
366. 11:43that is where things can get very messy
367. 11:45very quickly. If you start financing
368. 11:46weekly expenses like gas, groceries, or
369. 11:49that Friday night Chipotle bowl, it
370. 11:51becomes a slippery slope because it is
371. 11:52100 times easier to get into debt than
372. 11:55it is to get out of debt. But there you
373. 11:56have it, the truth about buy now pay
374. 11:58later. These companies spend millions of
375. 12:00dollars on psychological research to get
376. 12:02you to spend more than you can actually
377. 12:03afford. But now you know a little bit
378. 12:05more about how to protect yourself. And
379. 12:06if you like this video, make sure to
380. 12:08check out this video that covers the
381. 12:09business of Formula 1 and how
382. 12:11billionaires use debt to fund their
383. 12:13crazy hobby of racing.
384. 12:16[Music]