Young consumers are now being offered more financial products to fund their purchases. Aside from the traditional credit cards and personal loans, more retailers online and offline can now finance their shopping via “buy now, pay later” schemes.

It is a fairly new offering. BNPL services allow consumers to spread out the cost of a product over several months.

It sounds like a good arrangement. You get the product you purchased now, but you would not have to pay the full cost on the spot. Moreover, you only have to pay a small amount every month, making the purchase seem more affordable.

In most cases, it is preferable to credit cards, too, because it offers no or very little interest.

BNPL is not new. It has been pushed aggressively across the United States, United Kingdom, and other countries for a few years now. However, only recently has it started popping up in Singapore.

An Alternative Way to Pay

BNPL has seen a rapid rise in utilization. As of 2020, it has become the 7th most-used e-commerce payment method right behind digital/mobile wallet, credit card, debit card, bank transfer, cash on delivery, and charge and deferred debit card. However, by 2024, it is expected to move up to the 5th spot, overtaking cash on delivery and charge and deferred debit card — both of which will significantly decline in utilization.

Retailers love BNPL because it does not restrict the customer’s ability to spend. Many brands have already adopted this new payment method because it leads to an increase in conversion and average cost of purchases per order.

A previous survey found that about 38 percent of all Singaporean consumers have used BNPL. It is most popular among Millennials, with 44 percent of young people between the ages of 25 and 34 having utilized the service in the past.

The Hidden Dangers

However, Singapore’s Central Bank is warning young consumers against the excessive reliance on BNPL. The payment method is not inherently bad; it offers people a flexible way to pay for their purchases. However, officials worry that it could be setting up a lot of young adults, who are not financially literate yet or do not have earning capacity, to debt.

The Monetary Authority of Singapore, in an op-ed, told young consumers not to use BNPL for shopping sprees or to buy things that they cannot afford.

In the UK, a report revealed that one in 10 BNPL shoppers have been chased by debt collectors in the past for missed payments. About one in eight young people who have used BNPL to pay for purchases have encountered debt collectors for failing to pay off the cost owed on time. Needless to say, it is possible to go into debt because of BNPL.

Among American BNPL users, more than half of Millennials and members of Generation Z said that they have missed at least one payment.

Avoid the Debt Trap

BNPL could lead to consumers buying more than they can afford. It is more difficult to keep track if there are multiple purchases across several stores, and BNPL only performs light credit checks for borrowers unlike banks and other lenders.

Consumers that are struggling to pay off their mounting BNPL bills can take out a loan equal to the total amount owed. However, stay away from payday loans and avoid using your credit cards. These two options can put you into a debt spiral where you take out more loans to pay off loans. Instead, borrow a low-interest loan in Singapore that will be easier and more affordable to pay off.

Moreover, users should cut back on their expenses. They should create a household budget to reign in your spending and prevent it from growing out of control.

The best way to avoid going into debt because of BNPL is to keep track of it. Do not go overboard by setting a shopping limit depending on how much you can pay off every month. Before you make a new purchase, subtract previous BNPL monthly dues from your income and see if you can afford to add more. You should also mark deadlines on your calendar to avoid missed payments.

BNPL is not bad. It enables consumers to make purchases for things that they need, and spread the total cost over several months to make it more affordable. However, it can also be easy to abuse, too. Young consumers should be more aware of their purchases and keep track of their expenses to make sure that they are not incurring any debt that they will not be able to pay off later on.