Low wages, mounting student debt and rising rents in the trendy urban centers where millennials prefer to live leave young people with little to spend on luxuries like an iPhone, or tickets to Fyre Festival pt. II. So, since millennials can’t seem to buy anything outright, payment companies are partnering with businesses to offer financing options for goods that, in the past, would’ve gone straight on the credit card, according to MarketWatch.
With interest rates ranging from 0% to 30%, compared with the average rate of 17% on credit cards, millennials are increasingly financing purchases from airplane tickets to luxury bedsheets with loans from payment companies like PayPal and Affirm. Indeed, millennials' seeming inability to pay for anything outright has caused revolving debt in the US to balloon past $1 trillion.
“Millennials want luxury sheets, Peloton exercise bikes and music festival tickets, but they don’t always have enough cash or a desire to put them on a credit card. So they are turning to an even more expensive method of payment: financing. In recent years, payment companies including PayPal, Affirm and Bread have created installment plans for retailers that give consumers the option to finance the weirdest purchases over time.”
PayPal works with retailers to offer financing to consumers, who typically use it to pay for a range of goods, from guitars to luxury handbags. If borrowers don’t pay down their balance within an agreed-upon timeframe, they could see interest rates on the purchase rise as high as 20% APR.
“PayPal offers two types of credit, both as part of a program called PayPal Credit. One option is to wait six months without paying anything, and no interest on purchases over $99 from select retailers. The other option is an installment payment plan called Easy Payments: Consumers pay interest at an APR of 19.99% if they don’t first pay off their balance within the term they select.
Before shoppers are approved for either product, PayPal does a hard credit inquiry, which can result in a few points docked from consumers’ scores, temporarily. But once approved, PayPal doesn’t need to do a second one for future products. Consumers finance luxury handbags, guitars from Dave’s Guitars, pots and pans from Sur La Table and blenders from Vitamix, said Dana Warren, PayPal’s senior director of merchant distribution for PayPal Credit.”
Holly Hacker, Vitamix’s director of direct sales and customer experience, told MarketWatch that if you can’t afford one of their blenders, don’t buy one. But would young single people buy a nearly $500 blender if they couldn't finance it?
“Vitamix blenders start at $450, an easier purchase for higher-income households, but “out of range” for some who are younger, said Holly Hacker, Vitamix’s director of direct sales and customer experience.
Shoppers have also financed items including Cartier bracelets, worth $5,000 to $6,000 and Chanel wallets, worth about $1,700 to $1,900 from Linda’s Stuff, a luxury consignment website run by Linda Lightman, the company’s founder and CEO.”
Of course, personal-finance experts say consumers should avoid financing “discretionary” purchases like the examples mentioned above.
“However, personal-finance experts typically warn against making purchases, even on a financing plan, that consumers can’t afford. “You want to avoid financing these types of discretionary purchases,” said Nick Clements, the co-founder of personal-finance company MagnifyMoney, who previously worked in the credit-card industry. “If you’re looking for a way to finance discretionary purchases, look at your budget and ask yourself the hard question: Why.’”
Affirm, another financing company, says the most common type of purchase they help finance is travel, followed by home wares and apparel. That fits with millennials' penchant for valuing experiences like travel over physical goods. And what happens when a consumer doesn’t pay? Affirm takes a writeoff and sells the debt to a collections agency, then disqualifies the borrower from their service. With millennials showing.
Most millennials came of age during a period when interest rates were at rock bottom. But now that interest rates are slowly moving higher, will young people stop relying on debt to fund everyday purchases? Or will they slowly see their balances creep higher as they find it increasingly difficult to pay down what they owe, causing aggregate debt levels to soar?