Buy Now Pay Later, Phantom Debt

Is ‘Buy Now, Pay Later’ Putting Your Financial Well-Being At Risk? Analysts Chime In

For shoppers dealing with credit card and student loan debt, BNPL may look like a breath of fresh air, but data paints a different picture.

As the 2023 holiday season starts to roll in, American consumers are expected to use the popular “buy now, pay later” (BNPL) payment plans – but at what cost?

Analysts and the Federal Reserve Bank of New York have found some key features of the plans can set consumers up for excessive debt, The Associated Press reported. The short-term loans, such as Klarna, AfterPay, Sezzle, and PayPal’s Pay, often come with appealing interest rates, allowing shoppers to make the first payment during checkout and then pay the rest in installments in the next few weeks or even months. If shoppers are already dealing with credit card and student loan debt, it may look like a breath of fresh air, but data paints a different picture.

According to an Adobe Analytics report on online shopping, the concept brought in $6.4 billion of online spending in October 2023 – a 6% increase year after year. Analysts expect online use to peak in November 2023 with spending of $9.3 billion, including a record of $782 million on Cyber Monday alone. The overall estimation is one in five Americans plan on using BNPL plans for holiday gifts.

Lead analyst for Adobe Digital Insights, Vivek Pandya, points the finger at rising interest rates, food price inflation, and resuming student loan repayments as increasing the costs for consumers. However, he says, “data has shown that the consumer remains resilient heading into the big holiday season and they are embracing every opportunity to manage their budgets in more efficient ways.”

Demishia Alford said she uses the loans for household goods, clothes, and even plane tickets, and says she will continue to do so this holiday season. Alford plans to patronize retailers including Express, Shein, and Walmart for items like a crate for her puppy, electronics, and gifts for family members. The Greensboro, NC, native said her short-term loans average close to $200 or less and are a big help as she’s paying student loans, a car loan, and said both her credit cards are almost maxed out.

“I try to stay on top of it, especially in today’s economy,” Alford said. “Debt creeps up on you.”

BNPL often follow the same model, with the lender running a soft credit check and then asking for a down payment at the time of purchase. While terms may vary, the customer agrees to make between four and six payments at two-week intervals, with zero-interest loans being a common initial offering. But if the customer misses a payment or is late, they can be shut out from using the app, or face fees up to $25 or a calculated percentage of the outstanding loan.

According to Fox Business, two out of five users are holding a BNPL debt, and one-quarter of them missed a payment in October 2023. Twenty-five percent said they paid late fees, 27% saw a drop in their credit score, and 22% interacted with a debt collector. Morning Consult Financial Services Analyst Jaime Toplin said these numbers are troubling and may get worse.

“If their personal debt situation worsens, these figures could rise, creating real problems for these users at a time when interest rates are already high,” Toplin said.

Credit scores for fans of the plans are generally 50 points lower, with the average BNPL borrower scoring between 580-669 and non-users ranging around 670-739.

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