In an uncertain economy and amid stubbornly high inflation, it is increasingly difficult for many Americans to afford necessities, not to mention find extra money for holiday gifts. Market analysts say that is a primary factor for rising public interest in so-called “buy now, pay later” programs offered by short-term lenders.
On the surface, these plans seem to be a low-cost option to buy something on credit and pay it off — often without interest — over the next few weeks. Like any form of credit, however, experts say it is easy for consumers to get in over their heads.
In fact, since BNPL payment plans lack some of the safeguards associated with traditional credit cards, it could be even easier for people to rack up more debt than they can afford to pay off.
How Americans Take Advantage of 'Buy Now, Pay Later'
Of those who use #BNPL 45% are paying fees!
— Richard Turrin (@richardturrin) November 22, 2023
Since customers with poor credit scores can still obtain these short-term loans, individuals who might not otherwise be able to obtain credit are often approved by BNPL platforms. While this can be a good thing for struggling consumers, assuming they use the service responsibly, many fall into a debt trap that can be difficult to escape.
On average, researchers say consumers spend about 20% more in BNPL purchases than they would when using traditional payment methods. Furthermore, failure to pay the loan off within the prescribed period can result in interest charges, late fees and other additional expenses.
The amount of debt accrued nationwide through these services is up 6% compared to last year, reaching a total of $6.4 billion last month. Current trends suggest it will hit $9.3 billion this month, including a record daily total of $782 million on Monday as online retailers offer Cyber Monday discounts.
About one-fifth of all Americans are expected to use some type of BNPL plan to purchase holiday gifts this year.
Since these platforms often do not provide traditional updates to credit bureaus, customers are not rewarded for on-time payments with higher credit scores and, as LexisNexis Risk Solutions executive Kevin King explained, those who obtain short-term loans can easily obtain more debt than they can handle.
“Right now, it’s really tough for BNPL lenders to know that Kevin may have taken out a loan from four other BNPL lenders earlier this week,” he explained. “That can let consumers trap themselves in debt.”