Growing Trend of ‘Buy Now, Pay Later’ Raises Concerns Among Credit Experts

Growing Trend of ‘Buy Now, Pay Later’ Raises Concerns Among Credit Experts

The holiday season is witnessing a surge in consumers opting for ‘buy now, pay later’ (BNPL) payment plans, a trend that is beneficial for retailers but raises concerns among credit experts. These short-term loans, often attractive due to low-interest rates, allow consumers to make an initial payment at the time of purchase and then cover the balance in installments over weeks or months. This method is especially popular among younger consumers and those with limited access to traditional credit.

Despite the Federal Reserve Bank of New York recognizing the potential of BNPL plans to enhance financial inclusion, there is growing apprehension about their ease of access possibly leading to excessive indebtedness. In October alone, short-term installment loans contributed to $6.4 billion in online spending, a 6% increase from the previous year, as reported by Adobe Analytics. This figure is expected to peak in November, with projections of $9.3 billion in spending, including a record $782 million on Cyber Monday. Adobe’s analysis suggests that approximately 20% of Americans plan to utilize BNPL plans for their holiday purchases.

Vivek Pandya, Adobe Digital Insights’ lead analyst, notes that despite the financial pressures from higher interest rates, inflation, and resumed student loan payments, consumers are finding innovative ways to manage their budgets effectively. The BNPL model generally includes a soft credit check and a down payment, followed by a series of four to six payments at bi-weekly intervals. Initial offers often involve zero interest, but late payments can lead to restrictions on app usage or incur fees and interest.

Merchants welcome BNPL services due to the notable increase in business they bring. Research cited by the Federal Reserve shows a 20% rise in customer spending when BNPL options are available. However, a major concern is that these loans are not typically reported to major credit bureaus, allowing consumers to accumulate debts across multiple lenders without affecting their credit scores, a practice known as ‘loan-stacking.’

Consumers like Demishia Alford and Jessica Sarceda, who use BNPL services for various purchases, illustrate the balance they try to maintain amid other financial obligations. Meanwhile, Kevin King, Vice President of Credit Risk at LexisNexis Risk Solutions, highlights the underwriting challenges lenders face due to the lack of transparency and reporting among BNPL companies.

LexisNexis Risk Solutions, providing alternative credit scores for BNPL lenders, has found that these loans attract a higher proportion of non-prime credit applicants, particularly those under 35. Meanwhile, other consumers like Allison Williams use these plans for specific purchases while maintaining traditional credit card use for regular expenses.

As for the BNPL companies, they remain vigilant, with Chief Marketing Officer Jinal Shah of Zip noting their ability to quickly identify payment issues and adjust their underwriting processes accordingly.

This report has been produced with support from the Charles Schwab Foundation, committed to enhancing financial literacy through educational and explanatory reporting. The foundation operates independently from Charles Schwab and Co. Inc., and this journalism is solely the responsibility of The Big Big News.

Frequently Asked Questions (FAQs) about Buy Now Pay Later Trends

More about Buy Now Pay Later Trends

• Federal Reserve Bank of New York Study on Financial Inclusion
• Adobe Analytics Report on Online Shopping Trends
• LexisNexis Risk Solutions Research on BNPL Loans
• Charles Schwab Foundation’s Financial Literacy Initiative