The Conversation: Buying gifts? Why ‘buy now, pay later’ could be a dangerous option for many holiday shoppers

by | Dec 20, 2022 | Stock Market

Gift-givers hoping to splurge this holiday season despite the pinch of high inflation have an easy option: buy now, pay later. An ever-growing number of financial companies and apps are offering consumers what are essentially small, short-term loans that combine instant gratification with interest- and fee-free payments spread out in the new year.

As an economist who studies holiday spending, I became intrigued with buy now, pay later plans while researching a book on the transition to a cashless society. I only heard about them in the past two or so years, but now many of my students are considering using the plans to buy holiday gifts. I wondered, are these offers too good to be true?‘Tis the season Consumer spending surges around the holidays as many people buy gifts for their loved ones, often to put under a Christmas tree. This year, U.S. consumers are expected to spend nearly $1 trillion—which would be a record amount—in November and December. That typically amounts to about 25% of all retail sales during the year as consumers increase their spending. Per person, that averages to about $830. In the old days, before credit cards, consumers had few options to account for this surge in holiday spending—beyond simply setting aside personal savings. Some banks offered so-called Christmas savings clubs, in which customers could make automatic deposits throughout the year that they could use for gifts at the end. To ensure that accounts were not raided early, there were financial penalties for early withdrawals. These penalties were then distributed to people who waited longer for their savings. Retailers, for their part, created the layaway plan, which allowed consumers to reserve a product in return for a down payment, with further payments made throughout the year. Credit cards came about in the 195 …

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