Easy money no more?

By February 22, 2022Financial Planning

The possibility of rising inflation usually forces central banks to raise interest rates to dampen demand.

Currently, very low interest rates have been designed to retain confidence in the face of great uncertainty worldwide, but this looks like coming to an end.

One unfortunate side effect of such low rates is the ability to take enormous risk with other people’s money. There is little cost by way of interest expense and there are no shortage of people looking for high returns. After all, why leave your money sitting in the bank??

One area that we hope will be vulnerable to rising interest rates is the buy now pay later (BNPL) sector. As the name implies, these companies offer consumers the opportunity to buy a product immediately and pay for it in several instalments. They are touted as a low-cost alternative to credit cards.

However, to fund these purchases, the companies need funds to pay the merchants. Best then to borrow other people’s money at very low rates. With such low cost to borrow, it is simply a matter of signing up more and more consumers. However, as interest rates rise, the company’s profits can be badly squeezed and it may not be easy to increase the margins.

There has already been evidence that this is occurring, or at least that big investors believe it will occur. One prominent Australian BNPL company was sold last year for $160 per share. It is now listed in the US and valued at under $60 per share.

Whatever the financial status and investment argument is for these types of companies, we are simply of the belief that they encourage young people in particular to live beyond their means.

We are awaiting with interest to see if some entrepreneurial type comes up with a system to use buy now pay later to “invest” in crypto!