Buy now - Pay later....Watch out for hidden costs

The lure of stores offering “buy now, pay later” deals on big ticket items is difficult to resist for some consumers. But what are the hidden costs of the impulse buying these offers encourage?

At first glance, the option to bring home a high-tech sound system today with no thought of paying for it for 12 months (or more) looks perfect. Younger consumers, just starting out on their own, may see this as a convenient way to make major purchases and fill up that new apartment or house.

But experts warn of the dangers of purchasing large items through offers that include an introductory interest-free period, followed by a period of – you guessed it – high interest. Don’t forget the “administration fees” that some companies also tack on.

You can’t predict the future, and it’s possible that when the interest-free period is over, you may have less disposable income and more debt than when you made the purchase in the first place. Or, worst-case scenario, you may be jobless.

If you are unable to pay the full amount when the interest kicks in, the cost of the loan might wipe out any sale discounts you received, even if you got the item at half price. If you end up making monthly payments and decide to purchase payment protection insurance as a precaution, the cost of your “buy now, pay later” loan will have you paying through the roof.

And let’s look at the bigger picture. If the “no down payment” offer is appealing because you don’t have the savings to cover the cost of the item, there is a good chance that making the purchase will undermine your overall financial plan, especially if this type of shopping becomes a habit.

Is delayed gratification a thing of the past? Certainly cheap and easy credit has contributed to the idea that we can have what we want, when we want it. Some consumers treat credit like it is money in the bank, which can lead to a significant debt load if one isn’t careful.

In response to our debt-burdened society, there is a growing movement to return to the old-fashioned “layaway plan” to avoid paying the entire cost of a major purchase all at once. With layaway (which grew out of the Great Depression of the 1930s) you pay in instalments, but you don’t take the item home until it is fully paid for. If the transaction is not completed, the item is returned to stock, and your money is returned to you.

A new twist on layaway is electronic layaway, where you purchase items online. E-layaway allows you to purchase items through scheduled deductions from a chequing account. You can usually set the contract period, and you can adjust your payments online.

If you have a financial plan, you are already comfortable with the concept of delayed gratification, or “save now, enjoy later.” It’s important that your spending is in keeping with this overall philosophy, so that your plan stays on track and you can keep your goals in sight.

If you have questions about how to address existing debt or about your financial plan, we can help.