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The buy now pay later crisis

I am not talking about the ‘Buy Now - Pay Later’ (BNPL) - a type of finacial product that you can find information about on wikipedia. I am talking about the concept of buy now and pay later, which for me, includes:

  • Credit cards
  • Mortgage
  • High-Cost Short-Term Loans (Payday/Title Loans)
  • Buy Now, Pay Later (BNPL) Installment Plans
  • The famous American Federal Student Loans
  • And all kinds of other financial products that require you to pay a much bigger amount compared to your initial loan.

Finance people often rephrase ideas and present them with a twist, adding a new spin or giving them an updated fancy name. At the end of the day, they provide you with a loan of $x and require you to pay a significant portion of that amount later. This leaves you in debt, allowing them to continuously siphon money from you every day until you paid off the original loan. It doesn’t get any more complicated than that.

You can use the money as long as you can pay the interest on it

If someone has this mindset, they are in the last stage of being in debt.

Imagine you have a job that gives you the income of $3,000 a month (after tax and living expenses). Your bank sees this and recommends opening a credit card, giving you an additional $5,000 a month to spend for free. The only caveat is that you have to pay back the amount at the end of every month or else you’ll have to pay them interest. Let’s say the annual interest rate is 30%, and the minimum payment due each month is (the interest rate + 1% of the principal), in case you were unable to pay off the principal at the end of the month.

Great, now you can spend up to $8,000 per month, every month, as long as you pay the bank back $5,000 at the end of the month. Congratulations! You have just doubled your spending capacity. The bank is also very nice because the minimum payment is always greater than the interest rate. They make sure you are not in debt forever. If you don’t pay off the principal, you can spend $5,000 once and the debt will go away automatically in seven years and seven months (91 months). The total amount of interest you pay will be $7,663.82. This average to around only $85 for 91 months. If you’re in need of money, this doesn’t sound too bad at all unless:

  • You borrow 2 more credit cards from other banks: $170 per month for 91 months.
  • You have borrowed money in the past for college: $30,000 in principal, $400 per month.
  • You have a mortgage: $250,000 in principal, $2.500 per month.
  • You borrow money to buy your own personal car: $15,000 in principal, $500 per month.

Your $3,000 per month net income has been reduced to -$500. You now need to find a part-time job and work 50-60 hours every week for the next 10 to 30 years. But of course, this only happens if you have a lot of debt. And since it can happen, it will happen—maybe not to you, but to someone else.

The problem is the bank allows you to borrow $300,000 as long as you can give them $3500 per month. They don’t care if you can hold the job or not, whether you need medical attention, or if you want kids.

The debt crisis is coming for Vietnam

The story I just told you above is about an American who is deeply in debt. Only 25% of Americans are free of debt. If you’re not in debt, whether you are American or Vietnamese, the story isn’t about you—it’s about or it’s going to be about 75% of us: your friends, siblings, relatives, coworkers, etc.

I spent most of my career in the start-up world. In recent years, there has been a proliferation of financial products in Vietnam. The most profitable ones happen to be credit companies, which are subcompanies of banks. They report year after year record high profit. Private loan companies are opening up everywhere, running ads, and lending money to people. There are ongoing discussions about lending money to students for their studies, as well as the continuous increase in tuition costs. I’ve noticed instances where people are choosing to buy cars instead of saving money for a house. This upward trend is driven by the perception that having a car is cool & somehow raising ones’ status.

The same situation that affected Americans is now impacting Vietnamese, and I don’t believe we can avoid it without government intervention.

Be careful and warn others.