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There is an old saying in business, “It’s not about how much, it’s when?” Managing cash flow day-to-day, month-to-month is the most important financial skill for both individuals and business owners. A new trend among Gen Z and millennials can cause some severe cash-flow difficulties.
Gary Logan
Wes Shannon
This new trend is “Afterpay” a phone app that allows buying now and paying later (BNPL) for everyday purchases of restaurants, food delivery, hair and nail salons, and shopping to be paid out over four-to-six installments at no interest.
When a purchase is made paying with Afterpay the buyer has one-fourth of the purchase deducted from their account and then the remaining three payments are made every two weeks and there is no interest. The merchant pays a 4% to 6% fee just like a credit card fee. Nowadays, more and more merchants are adding the credit card fee to the bill. The advantage is that Afterpay does a “soft credit check” which has little impact on your credit score, and they don’t report the balance to the credit bureaus. If a payment is late there is a significant late fee attached and late payments or non-payments are reported on the user's credit rating.
Overall, I embrace this new technology. I’m all about using other people’s money for free, but that strategy is best with larger purchases. It would take many small purchases to truly make a difference with your overall financial plan to benefit from these no interest loans.
The main benefits to a no-interest loan are that your investments can make money while the no interest payments are made, but these small six-week loans aren’t really maximizing your investments since most checking and savings accounts are still paying very little interest and the term is too short.
My concern is that a consumer may get too many purchases under Afterpay that they can’t keep up with it all and soon their cash-flow management gets out of hand, and they end up paying late fees that negate all of the good from a no-interest loan.
My experience in working with Gen Z and millennials has given me a true respect for their conservative money habits. Our firm works with more than the industry average of second-generation clients. The ones we work with are good savers, living within their means. Their risk tolerance is lower than that of my fellow baby boomers. Afterpay is great idea of that generation and can be a useful tool, if limited to larger purchases.
Afterpay has on its website a very clear list of the pros and cons of using their service and I found nothing misleading about its service. Here are the cons:
- Late payments may incur fees, impacting overall cost.
- Limited to participating retailers only.
- Overspending is possible if users mismanage multiple orders.
- No traditional credit-building benefits from using the app.
The last item about no traditional credit-building benefits is also something to note if you are very young and trying to establish a credit rating.
My advice on Afterpay is for young people and teenagers to start slowly and use Afterpay for an expense of about $100 and wait till it is paid off to do another one. I wouldn’t recommend it for a DoorDash order or a pizza. Afterpay offers a great dashboard on its site and on the app for users to track and keep up with the charges. A user would be wise to check it daily.
Cash-flow management and savings skills are again classic services a Certified Financial Planning Practitioner™ can advise and help with. Young people getting started with their careers will benefit much more by starting to work with a financial planner sooner. There is a whole network of financial planners who focus on the needs of young people. It is called the XY Planning Network and it is a good place to find one’s first financial planner.
Wes Shannon CFP® is a Certified Financial Planning Professional for Brazos Wealth Advisors in Fort Worth.