Buy Now, Pay Later: Should You Avoid Lipa Pole Pole Deals?

Have you ever passed near a retail shop or visited an eCommerce site and seen a poster offering you the chance to buy products and pay in installments? The posters will often read, "Lipa pole pole," "Lipa baadaye," "Lipa mdogo mdogo," or "Buy now, pay later." These offers can be enticing, tempting even. And that is why you must understand how they work before signing up for them.

Buying products on hire purchase terms or paying in installments is not a new concept. It has been around for years in one form or another. But the rise of eCommerce in Kenya has seen this payment method explode in recent years. According to research quoted by Nation, the Buy Now, Pay Later model is expected to grow by over 107% in 2022. Astronomical numbers!

So what is Buy Now, Pay Later and should you use or avoid them? This article will explore everything you need to know about this financial product that has taken the country by storm.

Read Also: What is Consumer Debt, and Why is it Considered Bad?

What is Buy Now, Pay Later (BNPL) in Kenya?

Buy now, pay later is a type of short-term financing that enables you to buy products and spread out payments over time. When using this payment method, a seller will give you a product upfront, and you'll make a series of installment payments over an agreed period. 

Retailers will often partner with third-party credit companies to offer you this option, and you might be charged interest, or they increase their markup. When they do that, you end up paying more than the market value of the product. Other merchants won't charge you any interest depending on your agreement with them.

This form of payment can come in handy when you want to complete a purchase but don't have enough cash to do it. 

Read Also: Planning for Big Purchases: All You Need to Know

Let's say, for instance, your five-year-old work laptop has developed some technical problems, and you want to upgrade it soon. But you lack cash or simply don't want to dig into your savings now. So you can use the BNPL method to buy a new one. 

Here's how you could go about it using different types of BNPL financing

Types of Buy Now, Pay Later Plans

Pay-as-you-go Plan

Also known as PAYGo, this is a type of asset financing BNPL where a lender uses remote lockout technology as an alternative form of collateral. This means that if you fail to service the debt in time, the lender will remotely lock you out of your device, preventing you from using it. It is mostly associated with consumer technologies like phones, TVs, solars, etc.

In this type of BNPL financing, you get the product upfront after agreeing with the lending company and paying a deposit. Your agreement will highlight the loan duration and how much you will pay daily/weekly/monthly. Before you are approved, you will need to prove your ability to repay the loan. You can do this by showing proof of income. 

The lender will often give you a grace period, and if you fail to repay the loan after you have been locked out and restricted from using it, they will send auctioneers to repossess it, and you will be listed as a defaulter on CRB.

Read Also: Loans: How do I Prove my Income if I am Self-employed?

Layaway Programs 

Saving for big purchases can be challenging, especially if you struggle to balance your expenses and income. Every time you run into a deficit or an emergency, you might use what you have saved. Layaway programs are easily accessible and offer a way to save without breaking a sweat, going into debt, or affecting your creditworthiness.

Layaway is an installment payment plan where you pay for a product over a period of weeks or months but receive it after you have completed the purchase. You will be required to pay the seller a deposit with a promise to complete the payment within the agreed timeframe. This is unlike other BNPL plans that let you keep the item.

Layaway plans are usually advertised at 0% interest rates, but some retailers might sell products at a higher price, especially if you choose a prolonged duration. When selecting this program, you must stay committed, as the seller might charge you cancellation fees if you ask for a refund.

Read Also: How to Save Up for a Big Purchase, Painlessly

Using buy now, pay later Companies

The two plans discussed above have their limitations. The pay-as-you-go plan is limited to technology products that can be restricted by the seller remotely. You can’t use this plan to purchase, say, a bed. If you choose the layaway program, you will only receive the product after you have completed the payment, and it might, therefore, not be handy when you need something urgently.

So how could you buy a bed, get it upfront, and pay for it later? 

You will need to sign up with a BNPL company. These are firms that offer product financing solutions that allow borrowers to purchase a product and pay the total price in monthly installments. A BNPL company will pay for an item (e.g., a bed) directly to the seller on your behalf, and you will be indebted to them. Here's how it works:

Step 1: Decide where you want to buy the product - There are various BNPL companies in Kenya, but they don't partner with every retailer. Whether online or offline, you must choose the company that will allow you to shop at that particular store. (NB: Some BNPL firms have eCommerce sites on their websites.)

Step 2: Sign up for an account with a BNPL company to get pre-approved - You will be required to provide basic information like your name, address, income levels, etc. The company will then give you a pre-approved credit limit.

Step 3: Get approved - You must submit legitimate financial documents to the company. The company will ask for: a copy of your ID, three to six months' M-PESA and/or bank statement, and proof of income documents like payslips if you are employed. The company will authenticate the documents, check your creditworthiness, and offer you a loan limit.

Step 4: Go Shopping - Visit the store you want to shop from and put your desired item in a cart. At checkout, use the BNPL option. The seller will require your ID card to start processing the purchase.

Meanwhile, the BNPL company will be working on terms (like how much you will pay as a deposit and installments amount.) You will then be offered a contract, and if you accept, you complete the purchase.

Step 5: Start making monthly payments - After the grace period the BNPL company offered, you will start making the payments according to the term you agreed on. The company will send you an SMS reminder of when and how to pay. After the last payment, the product will be yours, and you can take another BNPL loan.

Read Also: 7 Things You Can do to Free Yourself from Short-Term Loans Forever 

The Advantages and Advantages of Using Buy Now, Pay Later

Should you use the “buy now, pay later” option to complete your purchase? Understanding the pros and cons of BNPL can help you make a more informed decision.

Pros of BNPL

1. Easily accessible both when shopping online and offline. There are also many companies you can choose from depending on your needs.
2. Low-interest rates and longer repayment terms compared to other consumer loans such as digital loans. 
3. It helps you pay for products you can't afford due to minor cash flow issues.
4. Fast approval if your documents are in order 
5. No collateral is required when taking a BNPL loan

Cons of BNPL 

1. It can cause you to overspend and buy products beyond your budget 
2. BNPL companies will charge you extra fees, including interest, late fees, cancellation fees, and even loan insurance fees in some cases
3. You will still need to continue paying even if the product is stolen or malfunctions
4. Defaulting might affect your creditworthiness as the company will list you negatively on the CRB
5. Some lenders might repossess and/or restrict you from using a product, and you will likely lose your deposit and installments you've already made if you default
6. They can affect your debt-to-income ratio and prevent you from saving or qualifying for other loans 

Read Also: How to Avoid the Trap of Consumer Debt 

When to Use Buy Now, Pay Later (and When to avoid)

BNPL pay later might be good for you in various scenarios. First, your intent in using this service should not be to buy something you can't afford. It will be an option only when you are confident you can meet the required monthly installments without affecting your budget or going into debt. It's suitable for someone with money locked up in other income-generating investments.

If you intend to use BNPL to keep up with the Joneses or show off to your peers, you should avoid this and learn how it can affect your finances. Living beyond your means can derail your financial goals and drive you to instability.

Read Also: How To Figure If Something is Worth Spending On

Second, BNPL might be good for you if you have already planned to take other forms of debt (e.g., personal loans) to finance your purchase. Compare the interest and other terms and pick what aligns with your goals. 

If you are using BNPL because you don't qualify for other types of loans or using a layaway program because you are blacklisted, you should avoid BNPL. Instead, learn how to cut expenses, clear your name from CRB, and manage your debt.

Read Also: Break the Cycle: 7 Simple Ways to Dig Your Way Out of Debt

Lastly, BNPL can work for you if you plan to use the purchased product to generate income or cut costs. For instance, you could buy a washing machine to set up a small laundry business or, if you have a large family, to reduce your laundry expenses. 

Questioning how the product will help you will ensure you make a better decision before going into unnecessary debt. For instance, using BNPL to buy an extra television set for your bedroom might have no financial value to warrant the cost of this credit. 

Read Also: How Not To Waste Money: Use The Cost Per Use Formula

How to Lower your Risk When Using Buy Now, Pay Later 

1. Take only what you can afford - Always consider the long-term implications of too much debt on your finances. Given their easy accessibility, you might find yourself taking out many BNPL loans simultaneously.

2. Read the FAQs page and the T&Cs - Before you sign up for any BNPL service, read about their services. What's their interest rate? What other fees do they charge? What happens when you don't make payments on time?

Additionally, before accepting the offer at the checkout stage, read the contract terms and ensure you understand them. Check for hidden fees and double-check the math to ensure you are not conned. 

3. Research the BNPL company and retailer - The industry is not well regulated, and no consumer protection policy exactly exists. Therefore, ensure that you thoroughly research a company before you sign up. Read reviews online and ask for recommendations from friends and family. Also, only use reliable retailers who sell original products with a warranty in case of malfunctions.

4. Pay Deposit on Delivery - When buying products online and you choose BNPL as your payment method, most legitimate companies will offer you a “pay deposit on delivery” option. This is important when dealing with a company for the first time. It will allow you to pay for a product you have seen and prevent you from falling victim to fake companies that offer "too good to be true" BNLP terms.

5. Consider all your options - Look at other financing options like using a Chama, SACCO, or traditional hire purchase. You can also consider postponing the purchase until you can afford to pay in cash. 

Read Also: 10 Financial Mistakes Everybody Should Make

WRAPPING UP

The decision to use cash or debt to finance your purchase is entirely on you. As with any type of credit product, you must use it responsibly to enjoy the benefits of BNPL. Since BNPL is a type of consumer loan, it could be best to treat it as such. Only then can you decide what's right between cash and debt financing, depending on your circumstances and needs. 

Finally, to prevent yourself from being dependent on credit when spending money, ensure that: you learn the importance of budgeting, planning your purchases, setting realistic financial goals, and living within your means.