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Buy Now, Pay Later: Usage Trends, Associated Benefits, and Risks Identified by Financial Experts

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Buy Now, Pay Later: Trends, Benefits, and Risks

The use of Buy Now, Pay Later (BNPL) services has increased, particularly during the holiday shopping season. Data from Adobe Analytics indicates that consumers financed over $1 billion in online purchases via BNPL on Cyber Monday, marking a record. Projections suggest this figure could reach $20.2 billion by the end of the holiday season, an 11% increase from the previous year.

How Buy Now, Pay Later Functions

BNPL allows consumers to acquire goods immediately and repay the cost over time through providers such as Afterpay, Affirm, and Klarna. This payment method often features easy access, interest-free periods, and no long-term commitment requirements. It can facilitate larger or unexpected purchases, particularly for individuals with limited or no credit history.

Associated Risks and Considerations

Like other forms of credit, BNPL arrangements carry specific risks. Non-payment of a BNPL loan can result in the debt being sent to a collection agency, which may then report to credit bureaus. This action can negatively impact an individual's credit score. A 2023 LendingTree survey reported that 41% of BNPL users indicated a late payment in the preceding year.

Financial professionals have identified several key considerations for individuals utilizing BNPL services:

  • Ability to Repay: Individuals are advised to ensure they possess the means to repay the full loan amount. Lisa Gill, an investigative reporter at Consumer Reports, states that BNPL approval does not confirm creditworthiness but rather indicates the lender's willingness to extend credit. Utilizing BNPL for purchases that cannot otherwise be afforded is associated with higher risk, according to Felix Aidala, a former senior research analyst at the New York Federal Reserve. A 2023 report from the New York Federal Reserve, co-authored by Aidala, noted that BNPL users are generally more likely to exhibit financial fragility.

  • Managing Multiple Loans: Taking out multiple BNPL loans simultaneously can lead to difficulties in tracking payment schedules and total debt. Lauren Saunders of the National Consumer Law Center highlights the lack of a consolidated statement for multiple BNPL debts. Ted Rossman of Bankrate notes that different loans, even from the same provider, may have varying billing cycles and repayment periods, with some plans exceeding six weeks potentially incurring interest. The prevalence of autopay in BNPL can lead to account overdrafts if funds are insufficient, potentially resulting in bank fees or budget adjustments. A strategy to mitigate this is to consolidate BNPL loans with a single lender.

  • Impulse Purchasing: BNPL options presented at checkout may lead to impulse purchases, potentially obscuring the total cost by presenting smaller installment amounts. Bob Sullivan, journalist and author of Gotcha Capitalism, suggests that anticipating future payment obligations can help consumers make informed decisions. A Bankrate survey from earlier this year found that over 25% of Gen Z BNPL users expressed regret regarding their spending levels with BNPL.

  • Limited Purchase Protection: BNPL loans typically offer different purchase protection compared to credit card transactions. Credit cards provide chargeback rights, allowing consumers to dispute charges for undelivered or damaged items. While many BNPL lenders have return or dispute policies, consumers have reported cases where payments were still required. BNPL lenders are not subject to the same strict regulations as credit card issuers, which can leave consumers responsible for payments even if issues arise with an order, as noted by Gill.

This digital story was edited by Malaka Gharib, with art direction by Beck Harlan. It forms part of content from NPR's Life Kit.