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> 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

by RC_ITR 4y ago

> 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)

tobyjsullivan 4y ago
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 4y ago
  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 4y ago
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 4y ago
  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 4y ago
    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.
    - deleted 4y ago
      [deleted]
    - RC_ITR 4y ago
      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?
      - pandaman 4y ago
        It's pretty simple really. Consider two scenarios of buying a $100 item: a) pay with a 2% reward credit card b) pay with BNPL scheme with a 3 month term. In the scenario a) you effectively paid $98 right away and in the scenario b) you pay $100 but after 90 days (let's say you don't have monthly payments for simplicity). For b) to be no more expensive than a) you need a way to make at least $2 from a $100 investment in 90 days. This means that whatever investment you make with the $100 has to yield 8% annually. Even though you withdraw money after 90 days. If you have monthly payments you need even higher yield to compete with the 2% reward. E.g. if you pay $33.33 every month then you need to make 1% yield per month to collect $2 off your initial $100 in 3 months: you get 3 months of yield from the final $33.33 payment, 2 months of the previous payment and 1 month of the first payment for total 6 months yield from $33.33. That's 12% annualized yield.
        4y ago
josephcsible 4y ago
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 4y ago
  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 4y ago
    > 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.

by RC_ITR 4y ago

tobyjsullivan 4y ago

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 4y ago
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 4y ago

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 4y ago
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 4y ago
  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.
  - deleted 4y ago
    [deleted]
  - RC_ITR 4y ago
    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?
    - pandaman 4y ago
      It's pretty simple really. Consider two scenarios of buying a $100 item: a) pay with a 2% reward credit card b) pay with BNPL scheme with a 3 month term. In the scenario a) you effectively paid $98 right away and in the scenario b) you pay $100 but after 90 days (let's say you don't have monthly payments for simplicity). For b) to be no more expensive than a) you need a way to make at least $2 from a $100 investment in 90 days. This means that whatever investment you make with the $100 has to yield 8% annually. Even though you withdraw money after 90 days. If you have monthly payments you need even higher yield to compete with the 2% reward. E.g. if you pay $33.33 every month then you need to make 1% yield per month to collect $2 off your initial $100 in 3 months: you get 3 months of yield from the final $33.33 payment, 2 months of the previous payment and 1 month of the first payment for total 6 months yield from $33.33. That's 12% annualized yield.
      - 4y ago

josephcsible 4y ago

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 4y ago
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 4y ago
  > 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.