Many consumers find that purchasing now and paying later is a godsend when money is tight. Others wish they’d paid upfront to avoid the pain later.
Tia Whiteside, 27, knew she was spending greater than she would have without “buy now, pay later” services – popular loans that allow borrowers to separate purchases into installments with little or no interest. While planning a day trip to the beach along with her 2-year-old son last 12 months, she spent $800 on Amazon purchases including a tent, recent outfits and a high-end sandcastle set from BNPL provider Affirm.
Whiteside, a behavioral analyst from Greenville, South Carolina, who treats childhood autism, makes good money; she and her husband collectively earn about $110,000 a 12 months. But the $6,000 in BNPL loans she’s taken out over about two years seems frivolous, she said, especially since they’re planning to buy their first home.
“I saw my salary being eaten up constantly,” Whiteside said, “and I thought, ‘Where is my money going?’”
The final straw was a $600 Dyson styler and hair dryer that she had only used once since purchasing it from the Affirm store at Neiman Marcus in early February. In mid-March, Whiteside stated that she had deleted the Klarna and Afterpay apps from her phone, but kept Affirm because she still owed money.
BNPL services have increased amongst buyers no matter income and credit levels for various reasons. Many people are on the lookout for protection against high bank card rates of interest. Some, after exhausting traditional lending options, are desperate for financial relief. Others simply want to raised manage their money flow.
The quickest take-up was amongst consumers aged 35 and younger, who make up greater than half of BNPL borrowers, LexisNexis Risk Solutions found late last 12 months. Many of them are becoming more so using loans for on a regular basis needs, and not only big-ticket purchases. While some already see them as a routine tool of their portfolios, others, like Whiteside, are turning away with concern.
“I can pay more freely with credit cards if I don’t have other consumer debt,” Whiteside realized, referring to her $10,000 card balance. After cutting back on discretionary spending and specializing in home-cooked meals, she said she was in a position to reduce her BNPL debt to about $1,200.
As BNPL use has increased, financial experts and researchers have raised the alarm about dangerous spending on the platforms, though they will often be used responsibly.
“I’m sure there are people who make good use of it, but on average we think it replaces a credit card,” said Ben Lourie, an accounting professor on the University of California, Irvine. “People are consuming more. There’s just no way around it.”
Lourie and other researchers from UC Irvine, Stanford and Singapore Management University analyzed the banking and credit card data of nearly 11 million consumers. They found that BNPL users earned at least $176 more per year in overdraft fees, credit card interest and late fees after starting to use the services.
While the transaction data they analyzed w article published on March 21, covering 2014-2021, Lourie said he suspected overspending “has gotten worse.” However, this can be difficult to quantify, in part because BNPL loans are not uniformly reported to the major credit agencies, resulting in ‘phantom debt’ that lenders are not always able to spot.
Some borrowers are warning others on social media against buying now and paying later, and several are criticizing the services’ advertising practices.
“I have about 10 PayPal payments left in 4 plans (luckily these are almost ready), $500 in confirming plans, and $2k. dollars on credit cards” – one Written by a Reddit user last year. “I just tried to get my parents off my student loans and was told I couldn’t due to the variable debt-to-income ratio.”
“I finally paid my Afterpay bill and they immediately sent me an email asking me to buy the shoes on installments” – a said the poster on X in February. “What part of me being poor don’t they understand?”
The services drew the attention of the Consumer Financial Protection Bureau, which found last year that most BNPL users had higher credit card utilization rates and lower credit scores than non-BNPL borrowers. The agency said many people were taking advantage of installment loans while incurring high interest rates on revolving credit card balances.
The report also found that Black consumers were 65% more likely to borrow on BNPL than the general population, followed by Hispanic consumers (47%) and women (35%).
After about three or four years of using BNPL services for designer clothes, handbags and Apple devices, 39-year-old Amy Baird was more than $9,000 in debt.
“It got to me,” said Baird, who lives in Dallas and works as a claims clerk for an insurance company. “I got myself into quite a hole,” she said, adding that she found support on a subreddit dedicated to shopping addiction.
Her boyfriend helped her secure a low-interest balance transfer card, which made it easier to pay off her loans with one provider at a time, she said. Baird said that after paying off her three remaining major BNPL lenders, she was left with an Affirm balance of about $1,200.
Financial planners often advise compulsive shoppers that after putting something in their online cart, they should reconsider their payment strategy or wait a day and then come back. But some borrowers and financial experts say BNPL platforms can make it harder to press pause.
Whiteside recalls that shortly after she paid off the loan, she received smartphone notifications from the Affirm app that told her, “‘You’ve been pre-approved for the quantity to spend,’ and that seemed slightly gross,” she said.
Many consumer credit products, including traditional credit cards, run regular promotions to attract and retain borrowers. But Kevin Mahoney, a Washington-based financial planner, said BNPL services are set up in a way that can shape the habits his clients are working on.
“You don’t really have to do anything other than click ‘Buy,’” he said.
This hassle-free nature can be especially tempting “on days when people are drained or stressed and you simply have less willpower,” said Mahoney, who works primarily with millennial consumers. Many younger borrowers – especially those with large, new financial obligations such as student loans – are suddenly finding that the scope of overspending is starting to affect them, he said.
Affirm did not comment on its ad, but said it insures every lending decision to ensure users are not overcharged.
“You see the exact total cost up front before you decide whether or not to transact, and it doesn’t perpetuate debt cycles of rising interest or profiting from junk fees and complicated math,” the spokesman said.
Afterpay pointed to features designed to “protect” consumers, including the flexibility to achieve this lower your spending limits and customize notifications. PayPal said it emphasizes “payment flexibility and selection” at checkout and considers borrowers’ repayment history in its lending decisions. Klarna said it has responsible spending limits for its users, whose average debt balance is $150 compared to over $6,000 for credit card users.
Some lawmakers have called for greater control of BNPL services.
Last fall, Senator Sherrod Brown of Ohio, who chairs the Senate Banking Committee, joined Senators Raphael Warnock of Georgia and John Fetterman of Ohio in in a letter calling on the CFPB to ensure that BNPL providers “do not take advantage of struggling consumers” ahead of the holiday season.
“Aggressive advertising encourages consumers to use these plans to make multiple purchases at multiple online retailers, creating debt they cannot afford to repay,” Brown said in a statement to NBC News.
For its part, Baird’s established BNPL services could make inflation and high interest rates “easier” for those who can control their buying impulses. But she has renounced them for good and encourages others to proceed with caution.
“Now I’m very afraid of them,” she said. “I do not need this in my life.”
