Buy now pay later: the two costs that are not on the contract

What does it mean?

Buy now pay laterTermBuy now pay later×التقسيطA purchase you make today, paid back in installments over weeks or months rather than all at once.Open the term is the option at the checkout that lets you take the item home today and settle the cost in regular payments over the following weeks or months. Specialized apps offer it at the point of sale alongside paying in full or reaching for a card, and it is usually advertised as interest-free, which is not the same as free: there may be administrative fees, and there are almost always late charges if a payment is missed.

The mechanism does not vary. A deferral is a deferral, and the price of the thing you are buying is the same whether you pay it once or in four parts. Some providers structure the deferral through murabaha or ijara rather than through interest, and the underlying arrangement, take now and pay later, is unchanged by that.

What varies is everything the checkout screen does not show you, and there are two of those. The first is whether anybody is writing down that you took the plan. The second is what happens to a fixed schedule of payments while prices move underneath it. Neither is a feature of the product, neither is on the screen, and together they are most of what the arrangement actually costs.

Why should I care?

A plan is also a credit event, wherever a bureau is keeping the record. Where one operates, providers report outstanding balances to it, and that makes a small purchase legible to institutions that have never met you. A missed payment on a pair of shoes sits in the same file that produces a credit scoreTermCredit score×التصنيف الائتمانيA numerical rating based on your payment and borrowing history that tells lenders whether you are likely to repay a loan and on what terms.Open the term, and a bank reads that file when it decides what to offer you on a loan years later. The consequence outlives the purchase by a long way, and it is attached to a decision made in a few seconds at a till. Whether it applies to you is a question with an answer rather than a guess: the provider’s own terms state whether balances are reported, and it is one of the few things about the arrangement that is written down plainly.

Where nothing is recorded, the silence is not the favor it looks like. A missed payment that goes no further than the provider is the better outcome in the moment and the worse one as a market. A lender who cannot tell a reliable borrower from an unreliable one cannot price them differently, so it prices for the risk it cannot measure, and it does that by raising fees across the board. The borrower who always pays on time funds the one who does not, and has no way to prove they are the first kind.

And the schedule is losing value the whole time it is being paid. An installment plan fixes a number of currency units to be handed over on dates in the future. What those units buy is not fixed at all. This is the same arithmetic this publication applies to savings, pointed at a debt instead: divide by one plus inflationTermInflation×التضخّمA general rise in prices over time, so one riyal today buys less than it did a year ago.Open the term rather than subtracting it. At 5% a year, a payment fixed today and handed over twelve months later parts with about 4.8% of its purchasing power on the way, because 1 divided by 1.05 leaves about 0.952. The faster prices move, the larger that is, and it is the one part of the arrangement that neither the provider nor the shop has any control over.

Set the rate the product pays to zero, put your own inflation in beside it, and what the calculator reports is what a sum fixed in nominal terms is worth after the period. That is the background arithmetic of every installment schedule, running whether or not anyone mentions it. It does not make a plan cheap or expensive, because it applies to the fees as well as to the price, and it says nothing about whether the purchase was worth making. What it does say is that a rule of thumb about what a deferral costs has a shelf life, and the shelf life is however long prices stay where they were when the rule was made.

What should I know?

The absence of a record is not a favor to the borrower. Where a bureau operates, a plan paid on time is data working for you, and the file that punishes a missed payment is the same file that eventually vouches for you. Where no bureau reaches, six plans paid perfectly build nothing you can show anyone. You keep the upside of a bad month and lose the upside of a good decade.

The costs written on the contract are the ones you can act on before agreeing. Administrative fees and late charges are stated, and the difference between two providers usually sits there rather than in the headline. The two costs that are never on the contract are the record, in the markets that keep one, and what the currency does to the schedule, in the markets where it moves.

Several plans at once are one obligation from a lender’s point of view. In a bureau market the balances aggregate into a single file, and a run of applications in a short period reads as pressure rather than as convenience even when every payment is met. In a market with no bureau nothing aggregates anywhere except in your own budget, which is the only place either kind of reader can see the total.

A plan does not change the price of what you are buying. It changes when the money leaves and how easy the decision felt. That is worth saying plainly because it is the one part of this that is identical at every checkout, and it is the part the screen is designed to make you forget.

The useful question before agreeing is not whether installments are good or bad. It is what the plan leaves behind after the item has been forgotten, and what the last payment is worth by the time it is made.