American consumers are expected to use “buy now, pay later” (BNPL) payment plans at record levels to finance their holiday shopping.
More Americans are expected to 'buy now, pay later' for the holidays. Analysts see a growing risk https://t.co/AiKrHXKXRZ
— FOX61 (@FOX61News) November 22, 2023
According to Bankrate, “BNPL services offer short-term installment loans that allow consumers to finance their purchases over a set period of time, interest-free.”
Over the last few years, these BNPL services have become very popular, especially for online shoppers. On the surface, because they offer an interest-free payback over a specified time period, they seem to be harmless compared to the financial risk of credit cards.
When used responsibly, they can be a tool to allow consumers to receive goods and services when they are needed and then pay for them later. There are, however, inherent risks with BNPL loans as well.
According to the New York Fed, “The Consumer Financial Protection Bureau (CFPB) has identified several risks associated with its growing use including inconsistent consumer protections, debt accumulation, and overextension.”
In the end, the same risks associated with credit card purchases are present with BNPL loans as well.
According to an Adobe Analytics report, “BNPL payment method is expected to set new records this season, driving $17 billion in online spending, up 16.9% YoY and $2.5 billion more than last year. Adobe expects BNPL spending to hit $9.3 billion in November, making it the largest month on record.”
The Adobe report estimates that one in five Americans will use the BNPL method of payment to purchase holiday gifts.
The increase in the number of people using BNPL loans coupled with the financial risks associated with them could be a bad sign for younger consumers.
A recent CFPB report stated, “Borrowers often exhibit higher measures of financial distress compared to non-borrowers. Some examples include having higher credit card debt and utilization rates, a higher likelihood of having an overdraft, a higher likelihood of revolving on at least one credit card, and higher utilization rates of alternative financial services like payday loans that charge high interest rates.”
BNPL loans can be a good way to purchase gifts and pay later without the threat of interest. However, the consumers most likely to use them are also the ones with the least amount of credit history.