The hot trend for when you can’t afford what you’re buying

The scariest financial figure of the summer: By 2026, almost a quarter of all online purchases worldwide will be made with a “buy now, pay later” option.

Did you think I was going to quote the rate of inflation or something to do with interest rates? Rates and inflation are a concern, but at least we now know what to expect. Buy Now, Pay Later (BNPL) is different because people are still becoming familiar with the ability to make installment payments for online purchases of cosmetics, clothing, airline tickets, and more.

Forecasts for BNPL were included in a recent review of emerging payment trends by Mastercard, which reported that 77% of Canadians have heard of BNPL and 30% are comfortable using it right now. Those who were cautious about BNPL tended to cite trust issues associated with rookie financial players offering the service.

The Mastercard report included a reference to a UK study showing BNPL spending would rise in four years to more than 24% of global e-commerce transactions for physical goods by value, up from 9% in 2021.

In other words, one in four people will buy things online that they most likely cannot afford here and now. There is no doubt that some people use BNPL to manage their cash and find it effective and efficient to pay in small installments with no monthly fees or interest charges. But let’s be clear about BNPL’s business model. Retailers pay the cost of providing this service – they only do so because they see the expense offset by higher sales.

High inflation and rising interest rates explain why this is a particularly risky time for BNPL to expand its franchise. Households are squeezed by higher costs for food, gas, mortgages, lines of credit, etc. BNPL pledges that seem affordable today could turn sour in the coming months, especially for people making multiple installments.

The Globe’s personal finance editor Roma Luciw and I discussed our reservations about BNPL in an episode of our Gen Z and Millennial Stress Test personal finance podcast. Listen to it before joining the growing crowd of BNPL users.

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Rob’s Personal Finance Reading List

Is tipflation a thing?

A rant about being asked to tip for just about any purchase at a cafe or take-out restaurant. A follow-up to my recent look at greed.

Make better decisions about money… and more

A list of decision support tools called razors that can be applied to finance and much more. One that stood out to me was the use of jargon and complexity, which we see so often in the investment world. “If someone uses a lot of complexity and jargon to explain something, they probably don’t understand it.”

How does your tax refund compare?

A summary of 2021 tax filing statistics, including the average refund amount. Of the 29 million tax returns processed by the Canada Revenue Agency during the year, nearly 17 million generated a refund. Remember that repayments are an interest-free loan to the government.

The best ultra-premium credit card

A review of American Express Platinum, with an annual cost of $699 that “is more than offset by all the benefits the card offers.” Benefits focused on travelers.

Ask Rob

Q: Why is CHIP such a bad idea?

A: I assume this reader is referring to HomeEquity Bank’s CHIP Reverse Mortgage. The big criticism of reverse mortgages is that they can seriously reduce the amount of money you receive when you sell your home. Essentially, you’re paying interest to access some of the equity in a home before you sell it. What attracts people to reverse mortgages is that you don’t have to pay principal or interest until your home is sold. Title of a column I wrote on reverse mortgages several years ago: “It’s time to overcome our disgust about reverse mortgages.” They are a legitimate financial tool for home-rich people who need cash. One of the biggest issues right now with reverse mortgages is the relatively high interest rate. There is currently a special rate for five-year CHIP reverse mortgages – 7.99%. Another tool for borrowing against home equity, the home equity line of credit, costs around 5.2%. The downside of HELOCs is that you have to make monthly payments of at least the interest due.

Do you have a question for me? Send me. Sorry I can’t answer each one personally. Questions and answers are edited for length and clarity.

Today’s financial tool

A reader asked for a downloadable retirement planning spreadsheet, and I looked for suggestions in a recent newsletter. A few people mentioned the range of spreadsheets available on the Measure of A Plan website.

The cashless zone

Blues guitarist Gary Clark Jr. performs When My Train Pulls In live. In pre-Covid days I saw it at the Ottawa Bluesfest and that song was a highlight.

look at this

A Tiktok video about a tiny, expensive shoebox aka condo for sale in Toronto.

Taken from Twitter

Piya Chattopadhyay, CBC host, on his frustrations trying to open bank accounts for her children. I suggested checking out the Tangerine Children’s Savings Account.

what i wrote about

More Rob Carrick and Financial Hedging

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