The increasingly common payment option soon will be available in Apple Pay. But when do the benefits of buy now, pay later outweigh the risks?

Welcome to Financially Well, the finance podcast for Millennials. On this episode, I want to discuss buy now, pay later (BNPL) payment plans. Increasingly, when we make a purchase, we’re given the option to make payments in installments over time. This offer can feel tantalizing in the moment. But when do the benefits of buy now, pay later actually outweigh the risks? With buy now, pay later coming to Apple Pay, we all would be wise to think through the tradeoffs in advance.

Does Loss Aversion Explain Why Buy Now, Pay Later Appeals to Us?

It’s painful to part with money. We all want to avoid a financial loss. Even a purchase that we need or value can come with conflicting emotions. As The Decision Lab explains, this cognitive bias, called “loss aversion,” explains “why, for individuals, the pain of losing is psychologically twice as powerful as the pleasure of gaining. …Simply put, it’s better not to lose $20, than to find $20.”

So recall the temptation you may have felt when you last purchased an expensive item. Typically, you might just input your credit card number. But in this case, you saw an option to buy now, pay later. Moments ago, you were fully prepared to surrender the full amount of the purchase. But now you’re wondering about the benefits of buy now, pay later. You’re thinking, “What would be the harm in several, smaller payments over time?”

Buy Now, Pay Later Comes to Apple Pay

This decision will only become more common for us. And the steps required will only become easier. For example, Apple recently announced, as reported in the Wall Street Journal, that they’re ”launching a buy now, pay later offering in the U.S. later this year that will allow consumers that shop with Apple Pay to split purchases into four payments every two weeks.” You soon will have a BNPL option built directly into your iPhone.

The Incentives Companies Have to Tout BNPL

“Merchants,” according to New York magazine, “love buy now, pay later because it increases basket size (by as much as three and a half times) and purchase frequency.” Author Scott Galloway adds, “Maybe they learned it from my industry, higher ed, which has been selling young people on “college now, pay later” for decades.”

With these clear incentives in place, both merchants and BNPL companies are eager to tout the benefits of buy now, pay later. The Wall Street Journal also reported that Apple “said it designed the service with ‘users’ financial health in mind.” And in an interview with SF Gate, Afterpay’s general manager of global platforms referred to his company’s BNPL service as a “budgeting tool.”

SF Gate journalist Joshua Bote notes that, “Each service has its own sales pitch on what differentiates it from other forms of debt: Affirm prides itself on not giving late fees to customers but may charge up to 30% APR on larger loans, while Afterpay offers zero-percent interest on every purchase, assuming that the user can pay on time.”

Buy Now, Pay Later Isn’t Inherently Irresponsible

When you find yourself vulnerable to the buy now, pay later sales pitch, you’re not automatically making a poor financial decision. These payment plans aren’t inherently irresponsible. And more harmful financial products and services certainly exist.

In fact, New York magazine writer Scott Galloway may have hit on why Millennials and members of Gen Z focus on the potential benefits of buy now, pay later:

“It seems smart, almost responsible. You know credit-card debt is how boomer-economy consumers wrecked their finances. And BNPL isn’t credit — it’s debit with fixed payments taken right from your bank account, and you’re told there’s no interest or late fees. It helps you plan your spending, letting you spend more now — so you do. You use Afterpay to buy sneakers from Reformation, and Klarna to defer payments on tickets from Live Nation, and Affirm to get a Peloton. Your approach to spending feels New Economy — the traditional laws of finance don’t apply.”

When Do the Benefits of Buy Now, Pay Later Outweigh the Risks?

The psychological aspects of money certainly still apply, though. We must acknowledge that buy now, pay later appeals to our aversion to financial loss. If we can admit as much, then we can evaluate when we might actually benefit from using BNPL.

Let’s consider, for example, someone living paycheck to paycheck. They might need to spread out payments to better align their purchases with the timing of their income. Pushing present-day costs out into the future may not be their preference. But the ease and potential terms of buy now, pay later may be the lesser of other financial evils.

Limited BNPL Use Likely Won’t Threaten Your Financial Stability

High earners and those with solid savings account balances may see little downside to buy now, pay later. You might think, “Why should I part with my money immediately? I’d rather have extra cash available for longer.” I’ve had the same thoughts. And if you feel passionately about that logic, one or two BNPL balances likely won’t threaten your financial stability.

And with an expensive purchase that you need or have thoughtfully considered, you may even keep open other opportunities for yourself. A large purchase, for example, may derail someone who is trying to build a monthly investment habit. With limited use, buy now, pay later can help to keep some financial goals on track.

Creating Buy Now, Pay Later Guidelines for Yourself

That said, I would set up some basic buy now, pay later guidelines for yourself. Long before you’re next faced with this decision, determine the maximum number of buy now, pay later accounts that you will have open at any one time. Research the repayment terms that the different BNPL companies use. You want to make sure you understand your obligations. And you want to know what oversights or mistakes would lead to a truly negative financial outcome.

As SF Gate journalist Joshua Bote cautions, “It can be easy to pile on debt — particularly when someone is using multiple services, each one with different repayment terms, and without a streamlined dashboard totaling the debt a user owes between the various services.”

The Best Question to Test the Benefits of Buy Now, Pay Later

Finally, I would set a threshold for the minimum purchase price for which you’re willing to use buy now, pay later. This guideline, in particular, ties to how you may want to evaluate BNPL for your life. Will using buy now, pay later on Apple Pay for a clothing purchase under $100 boost your finances in a meaningful way? Probably not. The benefit to your budget, your savings account balance, and your opportunity to invest will be minimal. In this case, the decision to use buy now, pay later isn’t even neutral. Making the purchase on your iPhone may feel easy, but you’ve ultimately just made your financial life more complicated.

As always, I appreciate you listening to Financially Well. As the podcast approaches it’s one-year anniversary, will you consider leaving a quick review when you finish this episode? Your rating on Spotify or brief feedback on Apple will help other Millennials like you find the podcast more easily. Thanks so much!

[Editor’s note: this article reflects the transcript (which I’ve edited for clarity) of a recent Financially Well podcast episode.]

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About Kevin Mahoney, CFP®

Kevin Mahoney, CFP® is the founder & CEO of Illumint, an independent firm in Washington, DC that offers financial planning for Millennial parents. He specializes in navigating the new financial decisions that arise during our 30s and early 40s, such as repaying student loans, buying a house, saving for college, & investing for the future. In addition, Kevin also leads a financial wellness benefits program for Millennial employees around the country, including group speaking engagements.