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

by Ethan Kim
Buy Now Pay Later Trends

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

What is the ‘buy now, pay later’ trend and how is it impacting holiday shopping?

The ‘buy now, pay later’ (BNPL) trend refers to short-term loans allowing consumers to make an initial payment at purchase and pay the rest in installments. This method is increasingly popular for holiday shopping, offering low-interest rates and appealing to those balancing other debts. It’s beneficial for retailers due to increased business but raises credit risk concerns due to potential excessive indebtedness among consumers.

How significant is the ‘buy now, pay later’ usage among consumers?

Usage of ‘buy now, pay later’ plans is significant, particularly during the holiday season. For instance, in October, such plans accounted for $6.4 billion in online spending, a 6% increase year-over-year. It’s estimated that around 20% of Americans will use BNPL services for holiday gift purchases, with spending expected to peak in November.

What are the concerns associated with ‘buy now, pay later’ plans?

The primary concerns include the ease of accruing excessive debt and the potential for ‘loan-stacking’, where consumers accumulate debts across multiple lenders without impacting their credit scores. Credit experts worry about the lack of transparency and reporting among BNPL companies, which could mask the true credit-worthiness of borrowers.

How do ‘buy now, pay later’ plans affect merchants and consumer spending?

Merchants benefit from ‘buy now, pay later’ plans as they tend to increase business, with customers spending about 20% more when such options are available. These plans encourage larger purchases, converting more browsers into buyers, which is particularly advantageous during the holiday season.

What is the demographic most likely to use ‘buy now, pay later’ services?

The demographic most likely to use BNPL services includes younger consumers, particularly those under 35, and those with limited access to traditional credit. These services are particularly appealing to non-prime credit applicants, including subprime and near-prime borrowers.

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

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SamanthaR November 23, 2023 - 6:20 pm

Great article, but I think it’s missing a bit on how these plans might affect people’s long-term finances? like what happens if you miss a payment…

Terry K November 23, 2023 - 9:12 pm

solid reporting on the rise of buy now, pay later. gotta say, it’s tempting to use these for holiday shopping, but the risk of debt seems pretty high.

Jake M November 24, 2023 - 1:16 am

really interesting read! didn’t realize how big this BNPL thing has gotten, especially around the holidays. But, is it really safe to stack up on these loans?

Alex W November 24, 2023 - 3:24 am

i’ve been using BNPL for a while now, and this article hits the nail on the head. It’s convenient but can be a slippery slope if ur not careful with budgets.


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