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“Buy now, pay later,” or BNPL, financing has garnered increased popularity in the U.S. in the face of elevated borrowing costs, but users have experienced friction tied to such services, from overspending to missed payments.
Consumers can use a BNPL service, which Affirm (NASDAQ:AFRM), PayPal (NASDAQ:PYPL), Block (NYSE:SQ) and PROG (NYSE:PRG) all offer, to make purchases and pay for them over time. Akin to a personal loan, BNPL plans allow users to split their payments for a product or service into equal installments over a period of time, often without having to pay interest so long as the payments are submitted on time and in full.
BNPL proponents have argued that the payment option enables greater credit access and financial inclusion among consumers, as requirements for the service are quite flexible. “But the easy access to credit and bite-sized payment structure doesn’t come without faults,” Bankrate said in a survey published this past week.
Some 56% of BNPL users reported they have experienced at least one problem while using the service. Overspending was the biggest issue among respondents at 29%, followed by difficulty obtaining a refund (18%) and missing payments (18%), said Bankrate, which had commissioned YouGov Plc to conduct the survey between March 4-6, 2024.
“While buy now, pay later can be a useful way to spread out the financial impact of a big purchase, it also represents a slippery slope that can lead to overspending,” commented Ted Rossman, senior industry analyst at Bankrate. “Many people have multiple BNPL plans running at the same time, which can add up in a hurry.”
The survey showed the two biggest advantages of using BNPL include the ability to stretch cash flow and low-to-no interest rates on the loans. To some, BNPL loans are a preferred alternative to traditional credit cards, “because if you’re too late with a BNPL payment, it probably won’t hurt your credit score – until you’re really late, that is,” Rossman pointed out.
“If you fall so far behind that you get sent to collections, that would really hurt your credit score,” he added. BNPL providers often don’t report to credit agencies until the borrower is 90 days late. By contrast, a 30-day late payment on a credit card can result in a substantial ding to a user’s credit score.
It makes sense that BNPL usage has been on the upswing in recent years, as the Federal Reserve is holding its policy rate at a two-decade high to further contain still-stubborn inflation. Even with the lingering tightening cycle, price pressures are persisting, and the labor market and economic growth both are proving resilient, giving the central bank more reason to hold rates higher for longer. Logically, an extended period of higher borrowing costs likely would spur consumers, especially cash-strapped or indebted ones, to flock to alternative payment methods like BNPL in an effort to make ends meet.
To be sure, New York Fed economists broke down in a survey last year who particularly engaged with BNPL, finding lower-income individuals were among those likely to use the payment option. Specifically, BNPL usage was elevated for those with credit scores below 620; those who were 30+ days delinquent at some point during the past year; and those who applied for a different type of credit over the past year and got rejected.
“BNPL may attract consumers who already have financial difficulties and are struggling to pay their existing bills and debt payments,” they wrote. “We cannot dismiss the potential risks of overextension, whereby frequent use of BNPL funding leads to excessive debt accumulation over time, affecting a consumer’s ability to meet non-BNPL obligations.”