The Psychology of Buy Now, Pay Later: How Installment Payments Shape Spending, Budgeting, and Debt with Dr. Abigail Sussman

Buy Now, Pay Later (BNPL) has surged in popularity, but how does paying in installments affect our spending, budgeting, and debt? In this Speaking of Psychology episode, Dr. Abigail Sussman explains why BNPL makes purchases feel cheaper, how people struggle to plan for outlier expenses, and why social comparisons and debt signaling matter. The interview covers practical strategies to improve financial decisions in a world full of tempting payment options, from creating realistic budgets with buffers to reintroducing spending frictions. It also explores how retailers exploit these biases with discounts, bundles, and scarcity tactics, and how wealth signaling can operate through payment methods as well as purchases.

Introduction: BNPL and the Psychology of Spending

The episode examines the rising use of Buy Now, Pay Later (BNPL) services and their impact on spending, budgeting, and debt. Dr. Abigail Sussman explains that BNPL makes expensive purchases feel more affordable by lowering the immediate price tag, which can lead people to buy multiple items for the same total they had planned to spend. In contrast to credit cards, BNPL highlights today’s payment while dissociating future payments from the total cost, creating a cognitive shortcut that can inflate consumption.

"you focus on the amount that you're paying today, and it dissociates the amount you're going to be paying in the future" - Dr. Abigail Sussman

Predicting Budgets: Why Outliers Break the Bank

The conversation then moves to how people predict expenses. Dr. Sussman draws on research showing that people predict baseline spending but often miss outlier costs (Halloween, holidays, birthdays). This prediction error leads to gaps in budgeting and can make atypical expenses feel like they should be absorbed within the budget, when in reality they occur irregularly and demand a buffer. A key takeaway is the value of leaving a placeholder or buffer for these unpredictable costs rather than assuming they won’t recur.

"one of the things that we find ... is that you can ask people basically repeatedly, how much did you spend last week? They'll say, $100. How much do you think you're going to spend next week? $80." - Dr. Abigail Sussman

Retail Tactics: Framing Costs, Bundling, and Scarcity

The host and guest discuss how retailers leverage BNPL and other strategies to encourage spending. Tactics include presenting immediate benefits while pushing future costs further out, bundling products to obscure superfluous purchases, and using scarcity and discounts to trigger a perceived deal. The conversation emphasizes the sophistication of marketing and the psychological pull of deals and delayed payments, which can nudge people toward higher overall spending even when they feel they are staying within a budget.

"the more you spend, the more you save" - Dr. Abigail Sussman

Social Comparison and Wealth Signaling

The discussion turns to social comparison, debt visibility, and wealth signaling. While conspicuous consumption has long been studied, the less visible side—savings and debt—shapes perceived wealth and decisions. People often evaluate others based on spending without seeing debt, which can distort judgments about who is financially secure. Sussman notes that signaling wealth through payment choices, not just purchases, can influence behavior and perpetuate a cycle of consumption driven by status considerations.

"not the consumption side, but the saving and debt side" - Dr. Abigail Sussman

Budgeting Under Stress: Uncertainty and Myopia

In times of inflation and job instability, people tend to become more myopic, focusing on month-to-month budgets at the expense of long-term goals. The episode covers how stress can reduce the likelihood of durable budgeting improvements, particularly for lower-income individuals, who may find budgeting less pleasant yet check budgets more frequently when they do engage with them. The panel also discusses how job loss can shift spending toward risk-averse or risky behaviors differently, underscoring the complexity of financial decision making under pressure.

"budgeting also less pleasant and are less likely to do it" - Dr. Abigail Sussman

Strategies to Improve Budgeting and Self-Control

Dr. Sussman offers practical guidance for sticking to budgets in a BNPL-rich environment. Recommendations include setting realistic budgets with buffers for unusual expenses, aggregating spending to match aggregate levels rather than category-by-category sums, and reintroducing frictions in online shopping (such as removing stored payment methods) to pause and reflect before purchasing. She also suggests planning purchases for specific, calm moments rather than shopping spurts driven by mood or boredom.

"automating the purchasing process and reducing frictions for spending" - Dr. Abigail Sussman

Co-Holding, Savings, and Debt

The episode revisits the concept of co-holding—holding both savings and debt—and explains why this can make financial sense in some cases but is often driven by mental accounting. The discussion includes recent experiments showing that in-app notifications about savings and debt can have limited impact on behavior, suggesting that many people deliberately manage two pools of money rather than letting them influence each other automatically. The insight underscores the psychological underpinnings of how people allocate resources across different goals.

"we feel responsible for having money in savings and we're able to ... mentally segregate savings in debt" - Dr. Abigail Sussman

Future Questions and Wealth Signaling

The conversation closes with big questions about wealth signaling and the future of payment methods. Dr. Sussman outlines ongoing work on how BNPL and other payment methods can send wealth signals, not just purchases, to both retailers and the buyer, potentially shaping future use. The podcast invites listeners to reflect on their own spending habits and consider strategies that align spending with long-term financial well-being rather than short-term temptations.

"the method of payment can make us feel differently about the expense" - Dr. Abigail Sussman