Impact of Debt Burden on Emotional Well-being in the Age of Installment Payments: An Examination of Financial Psychology Effects
In many parts of the world, including the UK, US, and India, people struggle with effective financial management, with a significant number admitting they've never learned to manage their finances effectively [1]. This lack of financial literacy can have far-reaching consequences, especially when it comes to the use of Buy Now, Pay Later (BNPL) services.
The psychological effect of "payment splitting" is a major concern. By breaking down payments into smaller parts, BNPL can make people less aware of the true cost of their debts, creating a false sense of financial freedom [2]. However, when repayment deadlines accumulate, users often experience increased anxiety about missed payments and late fees, leading to emotional distress and negative self-perceptions about financial responsibility [3].
This cycle of avoidance and deepens internal emotional instability. For instance, in the UK, youth may hide rent arrears to maintain an image of success and trendiness [1]. In India, families often take loans to organize lavish weddings, further exacerbating the issue of accumulating debt in developing economies [4].
Poor financial literacy exacerbates these psychological consequences by impairing consumers' understanding of the true cost and risks of BNPL. Users lacking financial awareness and self-discipline are more prone to impulsive buying and accumulating debt without fully recognizing the long-term financial impact [3]. This often leads to chronic debt and worsened mental health outcomes, such as increased anxiety and depression, due to the disconnect between the ease of spending upfront and the pain of repayment later [3].
Key underlying psychological factors include the illusion of affordability, instant gratification bias, and the emotional impact of debt [3]. BNPL divides payments into smaller chunks, reducing the immediate “pain of paying,” which diminishes emotional deterrents to spending and encourages overspending [3]. Consumers prefer immediate possession over delayed full payment, often ignoring whether they truly value the purchase in the long term [5]. Accumulated BNPL debt triggers feelings of guilt and anxiety, which amplify emotional distress and diminish financial well-being over time [1].
In summary, long-term use of BNPL, especially among populations with poor financial literacy, tends to foster psychological distress through increased financial anxiety and impaired self-worth, rooted in impulsive spending and underestimated debt load. Enhancing financial education could mitigate these negative outcomes by improving consumers’ understanding of debt risks and promoting better spending discipline [1][3].
It's crucial to recognize how emotional state affects financial decision-making in modern financial literacy. Purchases made for comfort or to boost self-esteem often lead to emotional spending, which can result in debt accumulation and chronic financial issues [6]. Even in high-income societies like the US, societal pressure can lead to debt traps [7]. The psychological impact of debt is closely linked to depression, anxiety, and suicidal thoughts [8].
As the use of installment plans and BNPL services increases each year [9], it's essential to address these issues head-on. Financial literacy programmes that emphasize the psychological aspects of finance could help consumers make more informed decisions, promoting financial stability and improved mental health outcomes.
- The integration of financial literacy education within science and health-and-wellness curriculums could help individuals better understand the psychological aspects of finance, potential mental-health risks associated with excessive debt, and develop appropriate personal-finance management strategies.
- Inadequate financial understanding and self-discipline can lead to an over-reliance on BNPL services, exacerbating the financial-debt burden and worsening mental-health issues, such as anxiety and depression, due to the disconnect between easy spending upfront and painful repayment later.
- Bedeviled by financial anxieties stemming from poor financial management, people may struggle to achieve overall well-being and health-and-wellness due to the long-term psychological and emotional toll that financial stress can have on their lives.
