[jameslk]

If BNPL are basically zero interest loans, doesn't it make sense for everyone to use BNPL as much as possible? The unspent money can then be presumably reinvested into e.g. the stock market or even a high yield savings account. A sort of interest rate arbitrage.

Ultimately the merchants are footing the bill and then they pass it on to consumers in the form of higher prices, further reinforcing the need to pay via BNPL to capitalize on the arbitrage opportunity. Kind of like how everyone pays with credit cards for the rewards.

[tfehring]

They’re free but there’s an opportunity cost - by using BNPL you forego 2% or whatever in credit card rewards, so you’re effectively paying ~8% annualized for a 3-month term. My understanding is that the BNPL providers are effectively paying interest out of their merchant fees (in that they securitize and sell the debt for less than face value and rely on fees to make up the difference), so as interest rates go up I’d expect the terms to become less consumer-friendly.

[freemint]

You get credit card rewards? Greetings from Europe.

[kristofferR]

Credit card rewards are quite stupid, though, as it obviously requires way higher credit card fees than if they weren't a thing. Customers just end up buying higher priced products and potentially getting the higher price difference back as rewards.

In Norway a card transaction with the national system BankAxept costs 0,06% + ~$1 cent per transaction [1], in the US the fees are usually at least a percentage point or two.

[1] https://vipps.no/alle-priser/bedrift/bankaxept-priser/

[josephcsible]

But we do have some credit cards that don't offer rewards, and they don't charge any lower fees to merchants than ones that do offer rewards do.

[kristofferR]

It's not about the card per se, it's about the network.

Visa/Mastercard in Norway is about as expensive as in the US. The US doesn't have a widespread miniscule fee/no rewards card network option however, like BankAxept is in Norway.

[bigjimmyk3]

As a former merchant, this was not my experience -- I recall seeing a notable difference between fees on similar transactions, and the tracing those differences back to rewards cards.

[josephcsible]

Do you remember the brand of any of the credit cards with the lower-than-usual fees?

[tempusr]

Yup, I don't know how credit cards are in Europe, but, here in America a lot of credit card usage is decided on what rewards the user gets for using it.

Some are better for groceries, air fares, or hotel bookings and pay out in different ways(cash, or an abstract token system that is formulaically tied to redeemable goods and their USD worth.)

This whole system is financed through credit card transaction fees that are applied to the business owner's expenses during the transaction. Note, the customer is not meant to pay for this fee and business that tac this fee onto the customer's bill can have their license taken away by the company that provides in the interface(VISA, MasterCard, etc.). The whole system is really interesting and worth a read on Wikipedia.

[josephcsible]

> This whole system is financed through credit card transaction fees that are applied to the business owner's expenses during the transaction.

That's part of it, but isn't another big piece of it financed by interest payments from people who don't realize that you're supposed to pay off your entire balance every month?

[tempusr]

I am not an expert on this topic tbh, but here is a VOX video about the topic more.

https://youtu.be/ySH5SudRwak

[RC_ITR]

> by using BNPL you forego 2% or whatever in credit card rewards, so you’re effectively paying ~8% annualized for a 3-month term.

I love your chutzpah, but you don’t get to do that math that way. The 2% doesn’t compound, it’s a one-time thing (unless you’re continually rolling over your BNPL purchases)

[tfehring]

It’s still useful to convert to an annualized interest rate even if your “investment” period is less than a year, because annualized returns are the standard unit of measurement for investment returns.

For example, if you’re debating whether to use a 2% rewards credit card or to use BNPL and keep the difference in a savings or money market account for 90 days, the latter strategy only wins if that account is yielding more than ~8%. Or if you’re deciding whether to use BNPL to let you pay down other debt a little faster, it’s only worth it if the interest rate on that debt is above ~8%.

[RC_ITR]

Yes. But let’s break this into first principles. You get $200 rewards on a $10k purchase. In no world do you get $800 on $10k. You only get $800 on $40k because the 2% isn’t a rate in principle so 8% literally never happens.

[tfehring]

The opportunity cost of 2% credit card rewards isn't a rate, but you can convert it to a rate by dividing by the time period. If you forego $200 in rewards to keep $10k for an extra 3 months, you're paying $67 or 0.67% per month for that money. If you instead forego that same $200 in rewards but get to keep your money for 6 months, you're only paying $33 or 0.33% per month. Converting those monthly rates to annualized rates of ~8% and ~4% respectively is just a matter of convenience, the math still works out the same if you keep everything on a monthly basis instead.

[RC_ITR]

But I’m telling you annualizing something like that is not convenience, it’s misleading.

Does every cash purchase also have an infinite APR? Because there I’m paying $200 for nothing. If that’s not logical then where does it start being logical?

[josephcsible]

Think of two scenarios where you're buying something for $1000.

Scenario 1: You use a credit card with a 2% cash back reward to make the purchase. You immediately pay off the credit card balance and claim the $20 of rewards. Your net cash flow is -$980 at time 0.

Scenario 2: You buy a 3-month zero-coupon CD for $980 today, and then use 3-month BNPL to make the purchase. In three months, the CD earns $20 of interest. You cash in the CD for $1000 and then use that $1000 to pay off the BNPL. Your net cash flow is again just -$980 at time 0.

The annual effective interest rate yielded by the CD for scenario 2 to work out exactly as described is roughly 8% (actually around 8.42%).

[RC_ITR]

Yes but who is going to pay you the 2% for the remaining 9 months?!?!

You’re incorporating a theoretical (and unrelated to 2% credit card rewards) interest rate into your calculations. I could easily say a CD yields 10% and this is a 50% APR then.

EDIT: Maybe to help you think about this: this is a purchase loan. It is not a cash loan. You got $1k worth of goods for $1k dollars. You can make arguments about opportunity costs, but that’s different than the traditional concept of APR.

EDIT 2: I’m posting banned but indulge me, what’s the APR of cash purchases?

[josephcsible]

> Yes but who is going to pay you the 2% for the remaining 9 months?!?!

Don't think of equalizing the terms by extending the BNPL. Think of equalizing the terms by shortening the CD.

> You’re incorporating a theoretical (and unrelated to 2% credit card rewards) interest rate into your calculations. I could easily say a CD yields 10% and this is a 50% APR then.

I'm not claiming that the ~8% interest rate is real. My calculations mean that if you can get that rate or better, then you should use 3-month BNPL, and if you can't, then you should use your credit card with 2% cash back instead.

> EDIT: Maybe to help you think about this: this is a purchase loan. It is not a cash loan. You got $1k worth of goods for $1k dollars. You can make arguments about opportunity costs, but that’s different than the traditional concept of APR.

I fail to see how that makes any difference.

> what’s the APR of cash purchases?

It's either the highest APR of any of your debt, if you have any, or the risk-free APR you could get from a savings account otherwise.

[RC_ITR]

> It's either the highest APR of any of your debt,

Yes, by your logic it is literally an infinite APR. $200 numerator / 0 years denominator. Doesn’t that imply that maybe your formula has some holes in it and this is a fundamentally different transaction (a take rate rather than an interest rate) than what you’re characterizing it as?

[tobyjsullivan]

Where did the parent suggest there was compounding? I read it as 2% of the purchase price, on a 3-month term. 2% * 4 = 8% annually, without compounding.

[RC_ITR]

Yes. But let’s break this into first principles.

You get $200 rewards on a $10k purchase.

In no world do you get $800 on $10k. You only get $800 on $40k because the 2% isn’t a rate in principle so 8% literally never happens.

[theandrewbailey]

For all the advice about taking a loan and investing the cash you would have spent, no one I know of does that.

Secondly, you are supposed to invest money you aren't going to use for at least 5 years. That's a much longer horizon than most product purchases. Why? Sometimes stocks/real estate/crypto/etc. goes down. Have you checked the markets lately?

[RC_ITR]

Exactly, no one you know does that because it’s actually sort of bad advice derived from how extremely rich people allocate capital.

Normal people generally have to hold a certain amount of cash anyway since they do not have access to collateral-backed revolving lines of credit and because they can’t afford to lose money that they know they will need to send in the future.

Unsurprisingly all the BNPL maximalists do not live under those constraints.

[rchaud]

Not just the extremely rich. That's why HELOC exists. So people can take a loan out on the value of their home. I wouldn't want to do this just to have some extra cash to invest, but some do use this to say, pay for college tuition, assuming the HELOC rate is lower than the college loan rate.

[1123581321]

Regular people who save anything do that, but it usually looks like taking a loan instead of dropping their 401k or IRA contribution.

[bobkazamakis]

>Secondly, you are supposed to invest money you aren't going to use for at least 5 years.

lol. Supposed to?

[dang]

Could you please not post unsubstantive and/or flamebait comments to Hacker News? It's not what this site is for, and it destroys what it is for.

https://news.ycombinator.com/newsguidelines.html

[smugma]

Credit cards give 1%+ cash back plus are interest free loans as well. You have 30 days to pay your bill and on average a purchase will be made 15 days into a billing cycle ie 45 days total.

So BNPL is not a compelling offer for those who have good enough credit to have credit cards.

[kgc]

Couldn't you use a credit card on a BNPL purchase to double your arbitrage?

[xur17]

I don't think BNPL loans let you pay them off with credit cards.

[nerdponx]

Short term investing for 3 months though? Seems like a good way to lose money on fees, then also either lose money on the investment itself or have your gains eaten up by capital gains tax, not to mention the time cost of finding good short-term investments in the first place. Or am I misunderstanding? Because yes of course BNPL is a hell of a lot better than credit card interest.

[gruez]

If there's a steady amount of spend you can put on BNPL (eg. $1000/month), you can roll over that investment month after month, rather than constantly investing/cashing out. Alternatively, you can park that money in a savings account or similar, and count that towards your "bonds" allocation of your portfolio.

[paulgb]

One snag of BNPL is that not all credit cards are accepted. When I tried it recently, I wasn’t able to use a Visa point card and had to use another low-points card instead. I didn’t do the math, but if you’re optimizing down to the yield from payment terms, you’re probably better off optimizing for points.

[Sebguer]

Most of them aren't really zero interest.