'Buy now, pay later' plans could lead to exorbitant debt for Gen Z consumers: expert
"Buy now, pay later" plans are growing in popularity among Gen Z consumers, driven by influencers on TikTok and Instagram promoting these services. But one personal finance expert says these services can carry serious financial risks for young people.
These services allow consumers to make big purchases and make interest-free payments in installments and typically don't require hard credit checks, if any, making them more accessible for young people who don't have a built-up credit score.
"It all started actually back with the initial lockdowns. We saw a big increase in online shopping. So, a lot of people got into the habit of it and now we're really seeing a target of Gen Z with these ‘buy now, pay later’ services," said MoneySense executive editor Lisa Hannam in an interview with CTV's Your Morning on Friday.
On top of that, Hannam said these services are being glamourized by influencers on TikTok and Instagram making "haul" videos, showing off all the cool items that they bought with these apps.
But Hannam calls these services "baby credit with adult consequences," warning that they could put young people's financial futures at risk.
"The baby credit part that you get a taste of using credit and loans with no interest and very straightforward payments," she said.
The "adult consequences" come when consumers don't make their monthly or bi-weekly payments on time.
"There could be fees. There could be interest. It could be tied to your credit card, which could eventually end up with collections agencies, affect your credit score and ultimately affect bigger purchases down the line such as a mortgage, a car or anything like that," she said.
According to a survey released last September conducted by Credit Karma, a personal finance company, 34 per cent of “buy now, pay later” users in the U.S. have reported falling behind on one or more payments.
Younger consumers were found to be more likely to fall behind on their payments. The survey found that more than half of Gen Z and millennial respondents who have used these services say they missed one or more payments.
According to a survey conducted by the Financial Consumer Agency of Canada between September 2019 and March 2021, the most common items purchased through “buy now, pay later” were furniture or appliances, electronics and clothing or fashion items. Of the respondents who used these services, 74 per cent said they spent more than $200.
And the “buy now, pay” later industry is only expected to grow. According to a February 2022 report from market research firm ResearchAndMarkets.com, the sector is expected to grow by 63.5 per cent on an annual basis in Canada.
Hannam said Canadians looking into these services need to read the fine print on the contract before signing on the dotted line.
"Make sure that you are reading the fine print that you are understanding the payment terms and when the payment has to come out," she said.
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