I don't get it.. There's a childrens song in Denmark, it's lyrics go, roughly translated "and if you have money, then you can have, but have you none, then you may go!" (it's about buying bread at the bakery)..
When I see how people spend money they don't have, I'm always wondering if their parents never sang for them when they were young, or if they are of a particular dim nature.
Sure, I can see why some people would take out a loan for big things like a house.. But for just about everything else? No. Either you can afford it or you can't.
"But I need a car!" Yes, but you don't need a car you can't save up for, you need a car you CAN save up for.
"But old cars break down and are expensive to get repaired" Yes, but you don't have money to pay someone else to repair it, old cars have cheap parts and are relatively simpler to repair, learn how to do it, you're not in a position to be fussy about what skills are beneath you if you can't pay someone else to do it, stop thinking so highly of yourself and get to it!
When I see the option to finance a sandwich, my brain just melts.. No! If you don't have money for fast-food, then go to the grocery store and buy the ingredients yourself, you can make a weeks worth of sandwiches for what one ready-made one cost.
I'll be honest with you, it sounds like you've lead a pretty sheltered life. Living in poverty is fucking hard. All around you are parasites looking to take what little you have and kick you back to the floor.
Yeah, of course parents tell their kids to do better in life. But it feels like the world is conspiring against you at every step of the way. The only time anything good happens, it's due to the kindness of someone else, and kindness is not something you see often.
To me, it sounds more like they have lived a European life, not a sheltered life. Outside of the UK, there aren’t any European countries I know of that use e.g. credit cards on a daily basis. We are taught to avoid taking on debt and are financially risk-averse.
Isn't that how most people use their credit cards everywhere, or at least everywhere in the developed world? I thought the 20%+ interest was just a way to take advantage of you if you mess up and rack up too big a bill, or forget to pay your bill.
Anecdata, but I know multiple people that I associate with do caray a balance on their cards and by paying minimums. I don’t understand it, but then again I’m fortunate enough to have a software job that allows me to keep up with my social lifestyle without incurring debt.
How is “buy what you can pay “ mentality a result of a “sheltered life”？ It is probably the opposite. Although I would add BNPL is largely embedded in US culture and education. Geez, we even apply that to our education..
"Everyone is ready to take money from poor people and that's why your racist (or whatever) if you don't let poor people give their money to people ready to take it from them!!!1!"
Also the notion that successful people should not be giving advice to people who are less successful, because then... what, the less successful people might become more like the successful people? -- anyways, that notion is completely backward. One could only endorse it if one really wanted the less successful people to remain down in life.
He is in Denmark, where there is social democracy, high taxes and all encompassing social programs to protect people from the ravages of the Randian market. Of course he lived a sheltered life. But its not a fault on his side. People in countries with Randian realities not being protected from the ravages of the economy is where the fault is at.
I think this is a bit too simplistic of a way to look at it. Having sone debt is not necessarily bad, even outside of enormous purchases such as a house or car.
First, c'mon, people don't (directly) finance sandwiches. Have you ever seen a sandwich shop accept Klarna? If you're talking about a credit card that's something but that's not what this article is talking about, which is BNPL.
Second, in general it's not as black and white as either having or not having the money right now. If you have enough regular income to afford something over time and the interest rate is low/0%, it may make sense to spread the payments out over time rather than all at once. For example if you wanted to buy a €5K camera and maybe you don't have the money all at once but can afford to make 12 payments, what's inherently wrong about doing so?
If you can afford 12 payments with interest, you can by definition also afford to save for 12 months and then buy the camera. BNPL and credit card companies are masters of exploiting psychology and especially currently prevailing wusiness and entitlement ("But I want it now!!!1!", "I deserve to treat myself like a king").
Or you can afford the camera outright, right now. What's better out of these options:
1) Buy for cash the camera now. You don't have any cash in hand afterwards, and the camera is depreciating in value immediately as an asset only offset by whatever you do with it.
2) Buy via BNPL with no interest for 12 months, and pay exactly a 12th a month. You have the camera, but you also have 91% of your cash in the bank that /does/ get interest or can be used for anything else like investing in shares. You still have liquidity and can assumedly use the camera to generate some cash doing weddings or whatever as part of your hobby for one year.
3) Save cash where you are getting similar rates of interest as 2 for 12 months once you've identified you need something. Buy the camera a year after you needed it, you have lost the opportunity of 12 months revenue from maybe one wedding a month? The price is either affected by inflation after a year, or more hopefully its gone down due to competition with other models, but who knows. Also do you still need a camera? you've certainly lost out on a years experience to know if it was worth it.
BNPL makes plenty of sense if you can or cant afford something, more so if you can.
Having my funds reduced to 91% the rest of the year is waaay worse for me, than having it reduced to ~0% the rest of the month. Because, the rest of that month, I'll be super-vigilant, I'll be acutely aware of why I have less money than normally, I know not to make anymore purchases, I know that this month is not for an extra treat, because I bought the other thing.
Next month I'll be back up to 100% capacity.
This affects my model of my financial situation, because, it's a camera then.. ~91%, it's a new toaster there ~86% and then ~40% and ~20% and now I get into the dangerous "poor" mindset, it's well proven (and I can personally attest to this being a very real effect) that having less money makes it harder to be financially vigilant, there's opportunity cost* for once, but there's also a tendency to "treat" oneself more because things feel tight, there's a tendency to short-sighted savings (the more expensive pr roll toilet paper, versus the cheaper bulk option that has higher up-front cost for instance).
Now, to begin with, I'd go into "savings" mode a month before buying something expensive, so that I'm not at ~0% for a month, I'd never do that.
* Sure, there could be 100% opportunity cost right after paying in full for something, but the recovery to full capacity is also quicker. I really prefer the large, immediate consequences over the smoothed-out slow-squeeze.
This looks like a weakness in managing your personal balance sheet. You're willingly sacrificing cash flow and interest to simply balance sheet management, which may be worth the tradeoff for some but for those of us with the required skills it's really not.
Any amount of debt creates a degree of moral liability. The more that your possessions become contingent on the continuation of your cashflow, the less you are able to push back against things that you know are morally wrong. Do you think you would be strong enough to tell your boss "no" if it could mean losing all of your valued possessions?
If we are to make up scenarios, I can take $5,000, go to a casino, observe roulette wheel and bet on black when I notice bias. Bam, I now have $10,000! I am the smartest guy ever!
Seriously, OP never mentioned investing in a business equipment but wanting a camera. Also, that camera will depreciate no matter how you paid for it, but you conveniently mentioned it only in the scenario 1.
Because I assumed you'd understand the depreciation of the asset is a lot less than the appreciation on your investments or cash that you can do in the other scenarios. The entire point is its offset. Also that's not a business asset description, thats just normal life??? WTF buys a camera and doesn't offset some of the cost doing their mates wedding? You're not thinking rationally if you think using the credit system is comparable to a roulette wheel. You control its use. You can just clear the debt if its interest free, its not grown or changed. The credit system is designed around returns for people who can't afford something at all. It's utterly predatory, but if you financially are entirely above the risk of paying interest its just a lot of flexibility in preserving your cash capital.
Moral aside of shooting mates' wedding and charging for it(!), but as soon as you use equipment to earn it's a business/side gig. You may not like it but I'm sure tax authorities of any sane country will disagree with you.
For the rest I actually agree with you and think credit system is predatory and that if one can, one should take advantage of it. Just that buying something on credit because want, and using that something to earn money are two fundamentally different cases.
Why is it a problem if it’s a business or side gig? In the UK at least that just means that you need to report the income on your tax return if it’s above a certain amount. It’s not difficult. I’m not sure I’d describe countries that make you do more than this as ‘sane’.
Dude what world (or country) do you live in? Im in the UK and everyone has a £1k self employment allowance, that gets you quite a nice camera! Filling out the return is trivial.
Okay, I repeat my question above: if you can afford to pay over 12 months (meaning, you don't go into debt to do so), what's inherently wrong with doing it instead of waiting 12 months and paying all at once, besides ideological reasons?
There is nothing inherently wrong with that but it's a lot more risky then saving up.
Say after 10 months an unavoidable bill of $4k shows up and I got to pay it. If I'm saving up I can redirect that money. It sucks that I don't get the camera when I planned to but otherwise I'm fine.
Under a BNPL plan I have no extra money to allocate and might have to dip into Credit (potentially with high interest).
In short: Savings are fungible, payments are not.
Studies show that huge percentage of the population doesn't have any savings. For them it's particularly dangerous to have more recurring bills.
Your method is just as risky - say after you've just spent 5K on your camera an unavoidable bill of $4K shows up? Now you have no extra money and have to dip into Credit (potentially with high interest). Your best strategy would have been to have $5K on hand and still use financing if the terms are favorable - it keeps your funds at steady level, allows for future planning and gives you opportunities to invest or otherwise grow your capital. And yes, people without savings pay for that, it sucks to be such people but they are paying regardless if you take advantage of the financing scheme.
Does it matter? Even if he only gets half the price back, that leaves 1500 left of the debt he has to pay out of pocket. If he's paying monthly for the camera, he suddenly has a $4000 bill on top of whatever of the $5000 debt remains unpaid. I think I'd rather be in the former situation.
Even if not having any debt is extremely important to you then you are still out of 2500 on your camera transaction, which is pure loss here. However some people consider not just an amount of debt but its other qualities too and for them having debt of $5000 with 0% APR might be preferable to having $1500 debt with, say, 20%+ APR. At the end you need to count a monetary balance and compare a ($2500) loss on camera together with the interest paid on your $1500 loan against paying $5000 for the camera.
If math is hard consider your end state:
1. Without the camera, without $5000 + interest on the $1500 you borrowed.
2. With a $5000 camera, without $5000 you paid for the camera.
The state of the $4000 bill is the same in both cases, which state you prefer?
> There is nothing inherently wrong with that but it's a lot more risky then saving up.
Cash is king. Assuming 0% interest, it's financially better and less risky to do BNPL. This is separate from all the other financial decisions like savings, etc...
It's similar with CCs. I love my CCs and get a ton of value and free stuff by using them. I also have never carried a CC balance in 20+ years. Someone who is financially disciplined is leaving money on the table when not using CCs.
>Someone who is financially disciplined is leaving money on the table when not using CCs.
The trick is knowing whether or not you're financially disciplined. And usually one finds out the hard way. It often involves a credit card or credit facility of some nature.
This here. Not everyone can do that. I personally can. I try to teach my friends and family to save a bit and use credit cards as a tool to get a small bit of free stuff. However, those things are deadly if you have no skill in saving in the first place. They will wipe you out with interest payments and then some. That method only works if you have the ability to save first and put off impulse buys. Even having something simple like a checking account can be bad if you have poor ability to balance your budget.
My wife for example does not have this ability, however I can manage it by basically controlling the amounts we have and putting restrictions on how money is spent that teach the lessons of saving that her parents for some unknown reason skipped teaching her. Lessons like 'you have X amount of cash lets save up for that thing you want' 'lets review our purchases and see if they make sense on the amount of income we have' 'yes, your friend has a need of 100 bucks and we can cover it but will giving them 100 just make them ask next time for 1000 and will it actually fix their problem or delay it?'
I think the ability to manage money well and not get screwed over by credit facilities is highly correlated with ones level of trait conscientiousness. It's less about skills per se than it is about that particular trait. I would wager those high in trait conscientiousness naturally tend towards frugality and budgeting and those low in trait conscientiousness tend towards impulse buys and poor financial planning.
My wife is 99th percentile for trait conscientiousness and I'm 1st percentile. I'm amazed at the amount of money she's able to save and her level of discipline and she's generally gobsmacked at the amount of money I waste and the random shit I buy.
Having the information about what one should or shouldn't do is only part of the equation. 8t also needs to be something you can apply, and sadly some of us just can't.
If you take 12 payments you, by definition, are in debt! It seems you are conflating debt with net worth - a person can have positive net worth and still have debt(s). Even if it is 0% interest you owe money to someone. Every debt is a risk. It may be smaller or larger, but it's a risk. It also normalises the behaviour of going into debt for buying depreciating objects which is bad by itself.
Paying in installments requires you to have a secure stable income.
You may not have one tomorrow.
You may lose your job.
You may go through a divorce.
Maybe you have to move for months because your house has been flooded.
You don't know what your tomorrow's financials look like.
The only time that it may makes sense to pay installments if if the interests are really 0% and you have lots saved anyway. At that point..why not improve one's credit score anyway.
> The only time that it may makes sense to pay installments if if the interests are really 0% and you have lots saved anyway. At that point..why not improve one's credit score anyway.
BNPL providers typically provide 0% interest rates for longer that credit cards, which have 0% interest for anywhere from 3wks to 7wks (depending on when your statement closes relative to when the transaction settles).
Always spend other people’s money, especially at 0%. The trap is it creates a mental pattern to condition you to accept paying interest on other purchases.
if you can get a loan at 0% interest it's definitely in your best interest to pay that loan back as slowly as possible. The longer you wait the less you effectively owe as inflation does its thing. I'm 46 and still paying on my student loan, the interest rate is so low that (even in normal times) inflation outpaces it. I'm making money by paying it back over decades.
I think the argument is that its easy to get out of control and leave yourself exposed.
If you have discipline then I don't see any problems. I might behov the industry to be forced to do more stringent credit checks before allowing it either by law or regulation.
I have no sympathy for adults (important distinction!) who have no discipline with their finances. They aren't children who literally don't know better.
Those who do have financial discipline should not be inhibited for the sake of those who do not.
Besides, /most/ cases of financial ruin aren't literal death. They are generally just very expensive and horrible-to-go-through life lessons.
You then pay off your outstanding debts if you think there is risk you will be paying out more in the near term... That's why you only carry debt when you could otherwise afford something. Literally thats the point. Realistically though its even better if you lose your job because you have the cash in the bank you would otherwise have sunk into an asset. I just quit my job to be self-employed and have a bit of a career break. Before I did I got a 24 month interest free credit card. If I suddenly have to pay for something really expensive like a new boiler or something, I can put it on there and I have two years to decide what to do, or get a job with zero additional cost. That's security more than it is a liability. I've had a perfect credit score and never paid for credit other than my mortgage interest. People who refuse to use credit out of some broken parental advice of "never carry debt" is far more reckless since you're ignoring an entire avenue of financial management for yourself. Absolutely don't carry debts you cannot afford. But everyone should abuse the fuck out of the credit system, and the institutions designed around fleecing people a lot stupider than you. The bar for credit company profits is set at people where money is like water through their hands, not people who know how to keep a personal budget in a spreadsheet.
You can’t pay it off if you weren’t able to afford it up front. You’ve changed the scenario from “I can’t afford the full cost but can afford monthly payments” to “I can afford this and am using monthly payments as an interest free loan”.
Ideally you have an emergency fund so it doesn't matter. But compared to paying the cost up front I think you'd be better of using BNPL actually. You'll have more cash on hand to pay for necessities like food/rent, in exchange for a ding to your credit score if you don't have enough money left over to pay the monthly payments on the camera you use for your budding photography business
The tricky thing is factoring death into the equation. At some point, given that we all might die on any given day, delaying gratification to save a small amount of interest isn't worth the risk. But of course that's hard to calculate.
Also, if you wait to buy something then you have less time to enjoy it, so it is theoretically worth a bit less to you.
Correct, you can always save indefinitely to get the required amount of money and pay for whatever all at once.
The problem is that the above is assuming that there is no value to having the thing you want to buy.
For example: a person might be able to save for 12 months to buy a new camera, but that's now 12 months they don't have that camera. Presumably you had reasons for wanting that camera.
While there are a bunch of things I don't think it's ever good to go into debt for, your claim that there's no justification other than "I deserve to treat myself like a king" is BS.
As per usual for articles like this they pose this in context of the extremes "sandwich in payments", which I suspect if people have done that it is accidental and/or "huh? what is this like".
You also get to pay off a real-world lower amount due to inflation. However for many (most? myself included) the reality is that easy credit like this does lead to over extending in the longer term.
while I agree I can also see cases where you need things not later, but now but you'll have the money later not now. e.g. moving to a remote village where you really need a car or buying that compute for data processing or rendering you need for your freelance work
> First, c'mon, people don't (directly) finance sandwiches. Have you ever seen a sandwich shop accept Klarna? If you're talking about a credit card that's something but that's not what this article is talking about, which is BNPL.
Paypal offers me a pay-later option, apparently no matter how small the amount is or what I'm paying for. Sometimes two options (pay everything next month + pay in instalments). Or perhaps it's alwys two? I haven't really paid attention.
The next-month option is free (for me) anyway. I assumed that the risk of a one-month loan is low for Paypal and worthwhile because it takes a few transactions from the other payment processors usually offered by the same webshop. But that's just an assumption.
Deliveroo customers will see Klarna as an additional payment option when they arrive at check-out, where they’ll be able to choose one of three payment options:
Pay Now, to pay the full amount immediately; Pay in 30, to pay the full amount within 30 days; and Pay in 3, to pay in three equal installments, spread over 60 days.
Back in my twenties I bought a car using a 5 year 0% interest loan from the dealer. I had the cash in the bank to buy it if I'd wanted to, but interest rates were around 7% at the time so using the 0% loan effectively gave me a 15% discount because I got to earn the interest on the value of the car instead of the dealer.
Managed debt is fine. It's only an issue if you over-extend yourself or you have a catastrophic change in circumstances (and you can insure your debt against that...)
Invariably people who use that service plan to spend 100% of their monthly income. Whenever you have an unexpected expense in that 12 month time frame and have to pay for that, then you can't make the payment on that loan.
Yup, debt is purposely setting you up to put you in exactly that bind, and then you owe the serious interest. Kind of a reverse lottery where you lose. It doesn't happen to everyone, but at scale, Life Happens, and a certain percentage of people will get behind and wind up paying huge interest, and there's the profit model.
Also, people are chronically up in arms about taxes, but here, they are signing up for voluntary taxes on everything. At least taxes buy something real, like roads, mostly reliably safe food supply, education, police, fire defense, etc., while interest just buys indulgence today then headaches tomorrow.
Interest is fine if you are creating an asset that create greater future value (e.g., building a business), or where the asset itself is a security (e.g., a house). But for transitory consumption, debt is a losing game. (I'm distinguishing debt from credit cards as a payment convenience paid every month - don't let them slide)
Hate to throw a variable into it, but I usually spend less than 50% of my income (after savings and retirment), and I still use BNPL and payment plans when I can get interest rates and fees for under 10%.
In America, the psychology and boom-bust cycle around every form of credit is really influenced by inequality.
Step 1: Create cashflow problems for poor people by delaying pay, but frontloading unexpected expenses (healthcare, education, repairing a broken car that gets you to work), making alternatives incredibly overpriced (renting vs owning a home), and adding extra fees for late payments overdrafts and similar. ("Being poor sure is expensive." [1])
Step 2: Expand access to credit in the name of equality. Sub-prime and aggressive lending products help people who are living inefficiently make better choices like buying a house, taking that job in the next town, getting a degree etc etc!
Step 3: New markets always mean (a) bigger interest rates being promised upfront, (b) borrowers who are less experienced with credit and (c) lenders who don't really know the nature of risks in he new market. This is a huge opportunity for middlemen to create products that are exploitative to the borrower (sandwich financing), to the lender (CDOs full of NINJA mortgages), or both -- so folks show up to do just that.
Just because you are financing, doesn’t mean you are buying things with money you don’t have, only financially illiterate people of a particularly dim nature would say that.
There are plenty of reasons to delay paying for things as much as possible, especially if the financing has zero cost. Say you bought a new £800 stand mixer on Black Friday. Splitting the costs in 3 allows you to deploy the funds elsewhere, such as investing in an index fund, buying bonds or put into a CD account or anything productive to offset some of the cost or if you are lucky, cover it. A dollar today is not the same as a dollar tomorrow.
Another common reason for that is to stretch your credit limit without affecting your credit score. Say your credit card has a £30k credit limit. There is an expensive 4-5 figure gift you want to buy for your girlfriend for Christmas or take an expensive holiday to some exotic location. You can afford it, but it’s going to cost a few months’ salary and a dip in your credit score. You can pay for your purchase with BNPL without leaving you nothing at the end of the next few months and have no impact on your credit score.
BNPL is a great financial buffer for everyone, as long as you have some baseline discipline to pay off what you owe.
> ay you bought a new £800 stand mixer on Black Friday. Splitting the costs in 3 allows you to deploy the funds elsewhere, such as investing in an index fund, buying bonds or put into a CD account or anything productive to offset some of the cost or if you are lucky, cover it.
Those 0% financing offers only exist because interest rates are extremely low. I don't know about others but you know what else is low these days? The return on my index funds. If I invest those £800 now, I miss out on what, £8 over the course of a year? Compounding that makes very little difference at retirement age but for many of us, the mental overhead to manage these loans and the chance of taking on too much (interest rates will go up again) and making a mistake is just not worth it. Besides, if you BNPL you wouldn't want to park that money somewhere volatile anyway, an index fund, what if interest rates rise and you need that money all of a sudden but your index fund didn't gain anything. All of a sudden you lost money. Maybe I just don't get it, I'm happy to learn if there's a flaw in my thinking here.
So you buy a stand mixer, make a bunch of dough, bake some bread and sell them. Plenty of ways to offset the cost. The how is not important, the important thing is you can. The worst it can happen is you have to pay exactly the labeled price some 3 months later.
If you're a business, I get it. Most people that are being targeted here though wouldn't fall into that category.
> The worst it can happen is you have to pay exactly the labeled price some 3 months later.
What if you parked the money and it lost value as I described? I think that's a worse case. So this only works if you hold on to the money in a place where it's guaranteed to increase in value (but interest rates are low) in which case the only upside is to offset inflation but I don't see how that would make a significant difference. If you're a business, sure but not for an individual.
If you parked the money and it lost value, it doesn't matter, because that's only relative to everything other than the stand mixer you bought. The price of the stand mixer is fixed at the time of purchase, it doesn't go up as time goes by.
I don't get it. If you bought the mixer and paid for it a year later but a year later when you have to fork over the money and it's suddenly not 800 bucks anymore but, say 750, you need another 50 bucks. So you spent 850 instead of 800, no?
The amount of what you owe is fixed at the time of a 0% interest BNPL purchase, just like a real purchase. Even if the interest rate is not 0, it’s still fixed.
It’s not a margin account where you have to call it if the value dips too low over time.
What in such simple concept is so hard for you to understand?
BNPL suggests that it's better to take the 0 percent and pay off the 800 bucks, say, 2 years later and park the money somewhere accrueing interest.
All I'm saying is if you're getting a 0 percent loan for the mixer, interest rates on your savings are not going to be great either and returns on index funds are not going to consistently go up either. It's not unlikely that you end up with your 800 bucks turning to 750 after 2 years but you still have to spend 800 for the mixer after 2 years. 800 you put in at the beginning, 50 you have to chip in at the end, you just paid 850 for that mixer.
> What in such simple concept is so hard for you to understand?
> 800 you put in at the beginning, 50 you have to chip in at the end, you just paid 850 for that mixer.
Honestly, if in 2 years you still haven't managed to save > $800 worth of your time with the stand mixer, you probably shouldn't focus on that $50 of depreciation.
The issue is that financing changes what is available in the marketplace for you to buy. There are cheap new cars that don't break down every year (ex. toyota hilux) that are not sold in the US. Because it's more profitable to finance you a 50k truck than a 20k truck.
The housing market works the same. If we didn't standardize fixed rate mortgages houses would be cheaper smaller and more available.
The Toyota Tacoma is pretty comparable to the international Hilux aside from powertrain (gas vs diesel) and a very small size difference. In theory you could probably get one for $30k.
> "But old cars break down and are expensive to get repaired" Yes, but you don't have money to pay someone else to repair it, old cars have cheap parts and are relatively simpler to repair, learn how to do it, you're not in a position to be fussy about what skills are beneath you if you can't pay someone else to do it, stop thinking so highly of yourself and get to it!
You're ignoring the "boots theory" [1]. A new or somewhat-recent used car is like the pair of boots of the story - the poor person that buys a trash barely roadworthy 2000$ car each year pays at least 20000$ over ten years plus whatever the extra cost of maintaining a trash car each year is, higher insurance rates, more fuel and has more trouble with unreliability and the followup costs (i.e. unplanned uber/whatever fees to get to work because the car broke down). Not to mention if they do repairs themselves, they need to have or acquire the skills and tools and have the time available for doing such repairs. Neither of this is cheap.
In contrast, the rich person who either buys a decent new/recent-used car or finances it pays roughly the same amount of money if he sells the car after these ten years, paid less for maintenance, insurance and fuel, had less issues getting to and from work and a higher quality of life.
The real problem is that a full time employed person in most Western countries can no longer afford a new Western-made car without going into serious amounts of debt. Cars have gotten too expensive and wages (especially after tax, rent and basic costs of life) have gotten too low - a complete turnaround from the Ford era whose principle it was that a worker should be able to afford the product he makes in a reasonable time!
I'm not entirely ignoring it, but I don't believe it holds true for things like cars. I've driven bangers my whole life, I mean really driven them to death, some to the point where they die on the highway, and I will do a quick inspection to decide whether I want to fix that or just have it towed direct to junk.
Now, cars are insanely taxes in Denmark, near 300%, and they lose about half their value the first year of ownership.
Every 2 years, there is a mandatory inspection of the car.
I buy a car with the following requirements: 1. My strong intuition that it can survive for 2 years with zero maintenance. 2. After 2 years, my TCO will be less than if I rented a new car. 3. It's freshly inspected so I don't need to worry about that for the next 2 years.
Sure, I get to drive old cars, but I bear zero risk, if I crash it, or someone drives into it, or I chose to use it as a ladder while wearing muddy boots (has happned) to reach something up high, I can do it, I can treat it as trash, it does not matter, it's not losing any value because I already wrote it off. A rental car, you can't destroy.. I feel having a car that I can destroy is worth more than driving a new car.
If, after 2 years, it looks like it can pass inspection, I try, and if it's cheap to fix, I fix what needs fixing, and drive another 2 years. This is a super-win situation, because then my yearly COO becomes about half of what it costs to rent.
If it can't pass inspection, I toss it, and buy a new one and I have "broken even" compared to renting.
I get the "don't worry about maintenance" perk of renting combined with "not getting in trouble if it's pretty beaten up when I'm done with it" perk of owning.
Sure, it means that I run a risk of a sudden breakdown, in that case, I'll get it towed (to junk or home to fix) and I'll have to take the bus, work from home or arrange a day off for fixing it, but it's been my experience that it almost never happens that a freshly inspected car fails randomly within the two years until next inspection.
> I'm not entirely ignoring it, but I don't believe it holds true for things like cars. I've driven bangers my whole life, I mean really driven them to death, some to the point where they die on the highway, and I will do a quick inspection to decide whether I want to fix that or just have it towed direct to junk.
Yeah, but you have the knowledge and skills that you can determine if a beater car is worth the effort. Most people, however, do not have either of these... they get shafted by car salespeople who just want to push cars off their lot and fleece people later-on for repairs.
And the problem just gets worse with more modern cars - I can fix up something like a Volkswagen T4 van or probably, if it comes around, a lot of shit on any 90s era car. But for anything more modern, particularly stuff where you need specialized diagnostic toolkits, 2000ish Renaults where you have to plan three to four hours for a headlight replacement [1] or built out of aluminium or worse, composite material? Fuck that, I'm out. Modern car construction has completely sacrificed repairability in favour of crash resistance, lighter weight and/or cheaper assembly.
Old French cars break down a lot and soon become worthless or a complete liability.
Old German cars break down less but cost a small fortune to repair when they do.
British cars such a Range Rovers and Jaguars can be problematic from day one and will continue to deteriorate thereafter.
Old Japanese cars tend to keep going forever.
There are a few outliers such as some older Fords that were over engineered but, generally speaking, observe the 4 points above and you won't go far wrong.
You might be subject to lesser risks, especially in a country like Denmark, but many people have at least some of the following risks of a car breaking down in the middle of the road:
1) collision. Simply being on a high speed road outside of your vehicle is one of the riskier things you can do in many parts of the world.
2) not being able to work and/or getting terminated from job
3) being stranded with young children
4) needing to be somewhere to take care of your dependents
As someone who only ever bought what you would describe as "trash" cars of up to 2000 Euros, let me give you some data.
Looking through my car repair/TCO excel file, I average to about 60 Euros per month in maintenance and repairs (that includes stuff like new tires every once in a while). Over the average lifetime of my cars (which is 5 years), that's 3600 Euros in repairs and maintenance. I regularly sell the cars for 500 Euros, so that's a TCO of ((2000-500)+3600) = 5100 Euros per vehicle, or about 1020 Euros per year.
The initial, 6-month manufacturer-suggested service for a new car alone is upwards of 2000 Euros, for a car that should not have and trouble. Most cars are nowadays impossible to repair yourself, or repair cheaply (new headlight bulb was 3 Euros before, now you have to change the whole 1300 Euro unit). But let's assume I'll have 150 Euros in maintenance per month... that's 9000 Euros. Depreciation over 5 years easily is a third of the vehicle's value, let's say 10000 Euros overall, on top of maintenance and repairs. Together, I get to a TCO per year of 3800 Euros, or a whopping 2780 Euros more!
Now, fuel efficiency. I drive about 25000 km/year. My clunkers consume - on average - 7.5 liters per 100 km - that's about 31.4 MPG. For something comparable, the manufacturer (if we want to believe them) currently lists about 5.8 liters per 100 km, or 40.6 MPG. This means that I could save 475 liters of fuel with a new car. A liter right now costs about 1.80 Euros, meaning I am leaving savings of 855 Euros on the table.
So ... I pay 2780 Euros more to save 855 Euros - BEFORE the extra cost of a loan to buy a new car ... NOT a good deal.
The boots theory does not really hold for mass produced items, including boots. A usable pair of cheaply made boots costs less than resoling a good pair of boots. I propose the Buzz Bissinger boots theory: Buzz is not rich because he buys fancy boots, Buzz buys fancy boots because he inherited a lot of money.
https://www.gq.com/story/buzz-bissinger-shopaholic-gucci-add...
The sweet spot in TCO for cars is generally (look at Edmunds numbers) a new compact in base trim. TCO will go up with a more expensive or "higher quality" car. If you are in the position between choosing to finance a new compact at low/reasonable interest rates or pay outright for a beater, the new car will be the better deal. A used compact is actually an OK compromise if you don't have money up front or want lower payments - a 5-year-old Corolla has slightly higher TCO than a new one, but not by that much.
Being able to pay on time for a compact car requires some basic financial stability but that's not "rich".
> A usable pair of cheaply made boots costs less than resoling a good pair of boots.
Yes, it does, but it's worse for everyone:
- those who make the shoes because the conditions under which clothing in general is made are horrible (see e.g. the numerous instances of fires in Bangladeshi factories)
- the environment because these cheap boots are made out of fossil resources, they have to be shipped around, and at the end of their life time they can't be recycled so they either end up in landfills or, worse, trash incinerators
- for the end user since shopping boots consumes time and effort
For cars, hell for virtually all mass produced items, the same principle applies. And it's only "cheaper" because a lot of the problematic factors involved are costs that are externalized.
Oh ok, I was wrong. Working people should spend more of their paychecks on boots to prevent fires in Bangladeshi factories, and then it will be more comfortable walking to work because they can't afford a car. And no shopping in your utopia either.
Working class people should have larger paychecks so that they can afford proper clothing.
Look up charts for wage development and minimum wage on one side, and charts for CEO pay and gini coefficients (wealth distribution) on the other, over the last 50 years. There you have the answer why a working class person can only afford crap shoes and beater cars.
But then they'll go shopping and burn more fossil fuels and buy more things that set Bangladeshi factories on fire! And throw their old things in trash incinerators! Shouldn't they just have to eat their old boots when they can't be resoled any more? By the way, where do you think new soles come from?
The boot theory is nonsense that at best only applies at a pretty narrow range of consumer goods - stuff that is barely fit for purpose vs stuff that is.
Cars are a great example because you pretty much can't save money spending more up front on one new car than on another new car, and there isn't even that big a difference in TCO between a new car and a comparable five-year-old car.
Working class people in the USA buy beater trucks to save over buying a new truck, which is a different trade, mostly because trucks are a working class Veblen good. They don't want to be seen in a Corolla.
> "But I need a car!" Yes, but you don't need a car you can't save up for, you need a car you CAN save up for.
How are you going to save up for a car if you can't drive to work? You certainly can't afford to move to one of the three places in the US with functioning public transport systems.
No, Americans are never sung that song, nor are we taught that debt is a bad thing, nor are we generally taught to save money by doing things like fixing our own cars. The societal focus is on maximizing income in your narrow employment, so that you can just buy new things and otherwise push your problems onto someone else.
And unfortunately, due to the overwhelming monetary inflation of our economy (which would otherwise experience strong price deflation due to technology and offshoring), taking on more debt is actually economically advantageous - you get to capture more of the classy handout that is the asset bubble.
In the last decade credit rampage has spread in Europe too, I still remember not long ago where the idea of buying things in installments seemed crazy to the average Italian. The only thing that gets a pass is a mortgage.
But buying a phone or computer in installments? How does that make sense?
You can't afford it, end of story.
I'm also not used to pay interests on my credit card, if I spend 1000 euros, at the end of the month takes away 1000 from my account and that's the end of story. Why would I pay interests on my daily finances, sounds crazy and a recipe for always having to worry about money.
> But buying a phone or computer in installments? How does that make sense?
> You can't afford it, end of story.
I'm not saying you are privileged, but I generally only hear this argument from people who have never been poor, or people in countries with functional social safety nets.
Having no computer, phone, car, or washing machine (or an extremely old one) can cost more money and time in the long run due to Capt. Samuel Vimes' boots theory of socioeconomic unfairness (https://moneywise.com/managing-money/budgeting/boots-theory-...).
For example, a lot of government paperwork is now online, if you have to do it at the local library now you have to spend the time to get there. Simple things like managing your passwords or personal documents is harder if you have to run your life from a thumb drive plugged into a public computer. If you have to use a commercial laundromat you will end up spending more money (not to mention time!) cleaning your clothes. If you have no car and can't afford to live in a walkable neighborhood you'll spend a good chunk of your life waiting for the bus. A car helps but a very old car eventually becomes a temperamental money sink that may also result in you being late for work which jeopardizes your income. Being poor is expensive and time-consuming in ways that people who have not been poor typically do not understand.
Of course many people go into debt to buy luxuries they do not need, and that is bad. But going into debt for items that save you time or money in the long run can be a financially sound decision.
I agree with all you say, but I don't see the connection between paying front up or in installments.
A decent laptop can be bought on craiglist or similar websites for 150/200$, and you can get a decent mid tier laptop from few years ago, a smartphone would be half of that.
Thus, where's the jump to buying a brand new computer in installments?
>Thus, where's the jump to buying a brand new computer in installments?
Sometimes you're "forced" to it. Me, a third-world student, buying a laptop expecting the thing to last at least 7 or 8 years before it becomes obsolete. Now, you have to drop something around 1000 USD when your monthly income from being a cashier at the local supermarket is 250ish.
Also (you can, but) you wouldn't be buying used because there are plenty of scammers around, no warranty in used electronics, and with such a large investment (4x your monthly salary) you become REAL risk-averse real fast. What do you do? You go to an appliances store and buy your new laptop in 18-24 instalments, with a 12-month warranty (or even more if the extra price for the extended time is worth it/low enough).
Guess from where I'm typing this and if there are any instalments left? :D
> I don't see the connection between paying front up or in installments
Paying up front typically means deferring the purchase until you can afford the full cost. If it takes you a year to save up for the car/laptop/washing machine then that means a year of dealing with the more expensive alternatives. In many cases those costs exceed a the interest on the loan, making it a financially sound decision to purchase the item in installments.
> A decent laptop can be bought on craiglist or similar websites for 150/200$
In my experience a craigslist computer is a crap shoot that is an irresponsible purchase unless you are experienced at repairing computers and keeping them going past end-of-life. The risk is just too great that it will not function or meet your needs which is not something you can afford. I'm not saying everyone needs the latest top-of-the-line MacBook, but the vast majority of people are better off buying refurbished and/or mid-level models that are not more than a few years old instead of a $150 craigslist special.
Ditto with cars. Unless you know what you're doing, trying to depend on the absolute cheapest car from craigslist will end up being far more expensive in terms of time and money than just getting a decent used car in the first place.
> If you don't have money for fast-food, then go to the grocery store and buy the ingredients yourself
If you're talking about the US, if you're poor the nearest grocery store will be miles away, dirty, and the prices will be a 50% markup over what people pay in nice neighborhoods. Also, McDonald's will sell you an entire meal for $3 and is down the street.
I was going to say the same. I suspect that anyone who believes that fast-food is more expensive than a grocery store has never lived in a poor neighborhood.
It's sometimes an emergency loan to get your car fixed or to get a replacement car, so that you don't get fired from the job you drive to, so that you have enough money to continue paying for a roof and food.
I personally hate debt and when possible I pay everything with cash up front.
My wife got pregnant, and our spending, specially on health was already sky high, so I did 5 months of overtime chasing a promised raise and possible promotion.
Then I got fired.
My last day of work was mid December. Child will be born soon. (Maybe even today, we are hoping for natural birth).
The medical crew we hired (back when I had a job and was chasing that promotion) want way more money than what I have left.
I will have to take a loan, because as far as I know I can't tell the baby to wait until I have a new job before coming out of the womb...
Need clothes, medicine, furniture, prepare the house (it is my first child, house is not kid friendly)
Also: I erased most of my savings buying a "cool" car and of course a lot of people criticized me for it.
What happened was:
1. My house is on the top of a huge hill in an rural area, only way to reach the house in practice is with a powerful car. The car I had before was barely powerful enough, if there was more people in the car it would fail to climb the hill.
2. Someone totalled the car I had, and my wife job was literally in another city, her workplace also in middle of nowhere.
3. I needed a new car urgently, options were: cheapest European or US cars were double the money I had saved. Asian cars (like Hyundai and Chinese ones) were 1.5 the money I had, but weaker that the totalled car, they certainly wouldn't climb the hill.
4. So I bought a used Mitsubishi Lancer. It is a cool flashy car? Yes it is. But it was 100% my savings (instead of 200%), powerful enough to climb the hill, and big enough to fit baby chair and all the stuff a baby needs. The corolla or the civic, used, were 200% my savings, new were 300% my savings.
So you can barely afford your own needs and have no savings, but you decide to have a child?.. No offense, I'm just curious about your thinking and priorities.
The person you are replying to had a job (likely in tech), a house, a car, and a chance at promotion when the child was conceived. That seems like a better position than most.
If your implied threshold for conceiving a child is that you must have acquired all of these things plus enough savings to weather unexpected medical events and extended job loss then that seems like a threshold that the majority of couples will not reach during their childbearing years.
See the SNL skit: Don't Buy Stuff https://www.youtube.com/watch?v=R3ZJKN_5M44 which advertises a self help financial book whose contents are "If you don't have the money, don't buy it"
Not having money, i.e. poverty, and how you have to balance needs/wants/now/future is bit more complicated than this. In the same way you can't tell an alcoholic to 'just stop drinking' or someone in an abusive relationship to 'just leave them'. Because there is more going on than a simple econ 101 decision process happening.
I always see articles like this and wonder what the big deal is... I frequently use PayPal Credit, store credit cards, and Affirm on larger purchases because I like being that much more liquid. Then I realize that I always use the 0% APR option and that I've paid exactly $0 of interest to all of these services. I couldn't imagine paying 12% APR for the privilege of owning a $1400 synthesizer much less for a delivery order of sandwiches at a house party (as mentioned elsewhere in this thread).
Side question: how are these services able to offer lower APRs than credit cards without collateral? Do they evaluate your creditworthiness on the basis of paying equal installments as opposed to revolving credit with a minimum payment? If so then how are they different from an old-fashioned personal loan from a bank?
There's "I use debt to buy things I can't afford", there's "I don't use debt to buy things I can't afford", and then there's "Yeah, I could totally drop cash on this but I'm going to take 0% debt just to avoid the liquid drain". If you're in that third category, you're just too far away from the first one to understand it very well. (In self discipline, not income. There's no amount of income itself that keeps you out of that first category!)
Nope, it doesn't make sense as you mentioned. But imagine that you were an investment bank with almost infinite cheap money has nowhere to go, you will probably put it into whatever dumb idea out there as long as there is a clear exit strategy. It's virtually exploiting those financially vulnerable ones by providing heavy incentive to lure them into using BNPL and bump up the share price so they can exit with profit. Even if it did not work out, it just a failed investment that can be written off.
But for those desperate users, as long as they can get what they want now, they don't really care whether if they can repay at all.
The fast fashion debate is similar to this. People who are against it say that it's environmental unsustainable and expensive to buy new clothes more frequently. People who like fast fashion respond that it's only rich people who have the luxury to buy durable, high quality clothing that lasts more than a season.
The pro fast fashion argument is that they have no choice. The reality is likely that they just like buying new clothes from these stores more frequently and can easily come up with a justification.
Time preference. People can't think in enough detail about the future or prefer pain later over pain now.
What's worse, the entire economy modifies itself to suit the needs of the borrowers. The price of goods increases for people who are paying cash because they are now competing with those who will borrow. Then policy is tailored to their needs via inflationary currency.
There is a reason ancient societies banned lending or had regular debt jubilees.
You sound like me, a friend who's not fun at objects party. All my friends told me I hold my debit card wrong, should get a nice promo credit card and spend like there's no tomorrow. All discipline they told me just eliminate 97% of the point of credit. "Someone else money" is the only appealing because the someone will take care of a lot of hustle for us.
When I see how people spend money they don't have, I'm always wondering if their parents never sang for them when they were young, or if they are of a particular dim nature.
Sure, I can see why some people would take out a loan for big things like a house.. But for just about everything else? No. Either you can afford it or you can't.
"But I need a car!" Yes, but you don't need a car you can't save up for, you need a car you CAN save up for.
"But old cars break down and are expensive to get repaired" Yes, but you don't have money to pay someone else to repair it, old cars have cheap parts and are relatively simpler to repair, learn how to do it, you're not in a position to be fussy about what skills are beneath you if you can't pay someone else to do it, stop thinking so highly of yourself and get to it!
When I see the option to finance a sandwich, my brain just melts.. No! If you don't have money for fast-food, then go to the grocery store and buy the ingredients yourself, you can make a weeks worth of sandwiches for what one ready-made one cost.