One of the hottest financing tools available to consumers today is the Buy Now, Pay Later (BNPL) payment option. Simply put, this payment option allows the consumer to take possession of an item they wish to purchase immediately but pay for it over time. The concept is not a new one.

A similar payment option, that has been available to consumers for years, is the layaway purchase option. Layaway allows the consumer to select an item at the store, ask the store to set the item aside for a period of time, and allow the consumer to pay for the item over a series of weeks or months until paid in full. Once the consumer has paid for the item, the store will allow the consumer to take the item home. 

Although both options will require consumers to pay for the item over time, only the BNPL purchase option will charge the consumer interest on the unpaid amount or balance due, until paid in full. It is essentially a short-term loan. For many consumers, the ability to bring the item home today using BNPL, outweighs the fact they will be paying for the item and paying interest on the short-term loan for many weeks or months. In contrast, the layaway purchase option is not a loan and does not require consumers to pay interest or a fee for this service.  Layaway is simply a way the consumer can pay for something over time without incurring any interest, special fees, or charges.

During a period of high inflation, however, both payment options present consumers with a hidden cost and financial risk. To understand the hidden cost and the financial risk, one must understand the definition of inflation. Inflation means the buying power of the dollar decreases as the cost of goods increases. In simple terms, during a period of high inflation, consumers can buy less with their dollar. 

With that in mind, it is easy to understand the hidden cost of using either BNPL or layaway. For example, the cost of the item today is $100.00. Under the BNPL option, the consumer would agree to pay the BNPL company $25.00 each month for four months, plus interest. Under the layaway option, the consumer would also agree to pay the store $25.00 each month for four months, without interest. In both cases paying off the short-term loan or the store over time with dollars that decrease in value means the overall real cost of the item increases because the buying power of the dollar decreases.

This means, the very best way consumers can fight inflation when purchasing goods and services is to pay for them in cash today and avoid paying for them over time with a dollar that is decreasing in buying power. If you are considering BNPL, you may find these Consumer Financial Protection Bureau resources helpful:

What is a Buy Now, Pay Later (BNPL) loan?

Know before you buy (now, pay later) this holiday season