(applause)
- Welcome back to TCSN.
We have a really special offer for you.
It's a turkey cheddar sandwich.
- Wow, look at that.
- This is handmade with avocado, tomato and lettuce
on an artisanal whole wheat baguette
and it can be yours for only
four easy installments of 2.99.
- That is a great deal.
Now I don't know about you,
but I like my sandwiches with chips and a drink.
- We've got you covered.
Look at this.
A bag of salt and vinegar potato chips
for three payments of 89 cents
and a diet Dr. Dinky cola for only six payments of 49 cents.
- Whoa, I'm sold and hungry.
How do I sign up?
- Just send us your name, phone number,
date of birth and social security number
and you can get approved in seconds.
- So easy.
- Paying for a sandwich in installments
may seem absurd to some,
but the practice is becoming more and more popular
especially among younger shoppers.
- Buy now, pay later loans
are one of the hottest new trends
in the world of financial technology,
touted as a less risky alternative to credit cards.
Using one of several major apps
you're only asked for a fraction
of the price at the point of sale
and the rest is paid off
in a few biweekly installments.
As long as you pay on time,
there's no interest.
- No interest?
- Oh, hold on Turbo,
it might sound like a no-brainer,
but any savvy spender knows
you don't dive headfirst into a new financial tool
without digging a little deeper.
How do BNPL loans really work?
What are the drawbacks and dangers
and what's in it for the companies that offer them?
(upbeat music)
- Times were tough during the Great Depression
and people weren't spending like they used to.
So merchants came up with a new system
called a layaway plan
which allowed shoppers to put a deposit down on a purchase
and pay the rest off in installments.
When the balance is fully paid off,
the merchandise is delivered.
- Layaway plans were popular up until the 1980s
when credit cards replaced them
as the preferred way to buy things
with money you don't have.
But over the last four decades
many Americans have soured on credit cards,
associating them with high interest payments
and lifelong debt spirals.
- So it's no wonder that young people
are starting to embrace Buy Now Pay Later loans
as a kind of modern tech reboot of the layaway plan.
Like layaway plans,
they have a no interest installment structure,
but like credit cards,
you receive the purchase immediately.
You don't have to wait until the balance is paid off.
- If you think this sounds like a good deal,
you're not alone.
Between 2019 and 2021,
the total value of BNPL loans from the major lenders
grew more than a thousand percent
from around 2 billion to over 24 billion.
The value of transactions financed this way
quadrupled globally, hitting over 120 billion.
More than 40% of Americans have used BNPL loans
and they're especially popular with younger people,
who make up about half the user base.
- And they seem to like it.
According to consumer reports,
most users report being satisfied with the service
and a survey by associate marketing Professor Anastasia Ghosh
found that unlike credit cards,
consumers felt virtually no guilt
about using BNPL loans.
- This is the part where we say, however, isn't it?
- Yes, it is.
However, there are drawbacks to BNPL loans
that consumer rights advocates
are trying to sound the alarm on.
These are extremely new financial inventions,
which means they're largely unregulated.
The Truth in Lending Act,
which protects you from unfair
or inaccurate credit practices,
doesn't apply to Buy Now, Pay Later.
They don't have the rewards programs
or protections of credit cards,
which means you might not be able to get a refund
if your purchase is lost or damaged in transit.
- And just because there's no interest
doesn't mean there aren't penalties for late payments.
Delinquency rates for BNPL loans have been steadily growing
over the last few years,
as have loans charged off as bad debt.
When this happens,
your credit rating takes a hit,
but the reverse is not true.
Most BNPL companies don't report on-time payments
to the credit bureaus,
which means they're not a viable way
to build your credit history.
- Also, one of BNPL'S most attractive features,
its ease of use,
is also a hazard.
People are increasingly using them for everyday purchases
like groceries, utility bills, and yes sandwiches.
This can lead to loan stacking
where borrowers quickly lose track of multiple loans.
People who use BNPL loans have seen a dramatic uptick
in overdraft fees and because many have their
BNPL accounts tied to their credit cards,
they end up paying interest anyway.
- But to understand the true danger of BNPL loans,
we need to look at the business strategy
of the companies that offer them.
These apps market themselves as friendly, cool,
almost altruistic organizations
just trying to help you live your best life, bro,
but we savvy shoppers know that no corporation
does anything unless there's something in it for them.
Which begs the question,
how does a lender that doesn't charge interest make money?
- The answer is merchant fees.
Retailers pay BNPL companies to finance
their customers loans
and the fees are three to four times higher
than those from credit card companies.
Which begs another question,
why are merchants willing to pay such exorbitant prices?
Because BNPL companies are really, really good
at getting customers to spend more money.
- If you're surfing an online clothing store
with a hundred bucks to spend,
you might see a cute top that usually goes for 80 bucks,
but you can have it right now for a deposit of just $20.
Throw in a shawl, a hat, pair of boots
and your $100 has financed a whole new outfit...
with about $300 in installments to pay off.
- A recent economic study found that using BNPL loans
increases one's spending habit by $60 a week,
bloating the average American's retail budget by about 30%.
Meanwhile, they're tracking your purchases
and collecting your data to develop more
effective ways to get you to spend more.
As the director of the
Consumer Financial Protection Bureau put it,
these firms aren't just lenders,
they're also advertisers and virtual mall operators.
- We have a tendency to become entranced by new tech
and think that apps with upbeat names and hip marketing
are really changing the game for the better,
but as we've seen before,
some tech companies are not so much disrupting the industry
as just muscling their way into it.
- That's why some economists think that this
Buy Now, Pay Later fad is just another loop
in America's eternal credit cycle.
It may seem like the shiny new thing,
but it will quickly lose its luster
if consumers keep overspending themselves into debt.
- [Group] And that's our 2 cents.
- Thanks to our patrons for keeping 2 cents
financially healthy.
Click the link in the description
to become a 2 cents patron.
Wanna know more about how the internet
nudges you to overspend?
Check out our video, How Social Media Keeps You Poor.
(upbeat music)