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Americans have loved the “buy now, pay later” service, but the “pay later” part is getting more difficult for some borrowers.

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Buy Now, Pay Later credits allow users to pay for items such as new running shoes, electronics, or luxury items in installments. Companies such as Affirm, Afterpay, Klarna and PayPal have created popular financial products based on these short-term loans, especially for young borrowers who fear endless credit card debt.

Now that the industry is gaining customers, the number of late payments is on the rise. Inflation puts pressure on consumers, making it difficult to pay off debts. Some borrowers do not budget properly, especially if they are coaxed into taking on multiple loans, while others may have been exposed to credit risk from the start.

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“You have an industry with a higher concentration of subprime borrowers in a market that hasn’t been effectively tested (this type of economy) and you have a kind of toxic mix of fears,” said Michael Taiano, an analyst at Fitch Ratings who in July became co-author of a report highlighting some of the industry’s challenges.


The most popular type of “buy now, pay later” loan has four payments over six weeks – one payment at the time of purchase and three others that borrowers often try to synchronize with payment periods. Long-term loans are also available for large purchases. Most short-term loans do not have interest attached. Companies that charge interest can clearly state in advance how much the borrower will pay in finance charges.

Given these characteristics, consumer advocates and financial advisers initially viewed “buy now, pay later” plans as a potentially healthier form of consumer debt if used properly. Of greatest concern were late fees, which could become a significant financial charge on a small purchase if the borrower was late on payment. Fees can be as high as $34 plus interest. But now that late payments are on the rise and companies have become more aggressive in marketing their products, advocates see the need for more regulation.

The industry is growing rapidly, according to a report released Thursday by the Consumer Financial Protection Bureau. Americans have borrowed an estimated $24.2 billion in buy-now-pay-later loans in 2021, up from just $2 billion in 2019. This industry-wide figure is expected to jump even further. In the first six months of this year, Klarna customers purchased $41 billion worth of goods worldwide, up 21% from a year ago. At PayPal, “buy now, pay later” revenue more than tripled in the second quarter to $4.9 billion.

Jasmine Francis, 29, a technology analyst in Charlotte, North Carolina, said she first used the buy now, pay later service in 2018 to buy clothes from fast fashion brand Forever21.


Sneakers on display

“I remember I just drank a full cart,” she said. “At first I thought, ‘Something has to come back,’ and then I saw Afterpay at the checkout — you don’t pay for everything right now, but you get everything right now. It was music to my ears.”

It is not clear how purposefully customers use “buy now, pay later” loans. Fitch found that delinquency on these services rose sharply in the 12 months ended March 31, while delinquencies on credit cards remained stable. And, according to the CFPB, a growing percentage of the industry’s loans are being written off — or loans it thought were so bad they were probably bad. The industry’s write-off rate was 2.39% in 2021, and that figure is likely higher now given the economic turmoil this year. In 2020, this figure was 1.83%.

“This upward trend in delinquencies continues,” Rohit Chopra, CFPB director, told reporters.

Lending company TransUnion found that borrowers who buy now, pay later, use the product as often as they use credit cards, accumulating debt on top of additional debt. A survey by Morning Consult published this week found that 15% of customers who buy now pay later use the service for routine purchases like groceries and gas, a concern for financial advisers. The CFPB report also found a small but growing number of Americans using these products for general shopping.

“If these buy-now-pay-later plans aren’t properly budgeted, they can have a cascading effect on a person’s entire financial life,” said André Jean-Pierre, a former wealth management advisor at Morgan Stanley who now runs his own financial planning firm. about helping black Americans with adequate savings and budgets.

Another issue of concern to consultants and consumer advocates, as well as Washington legislators and regulators, is the ease with which consumers can get these loans in installments.

Speaking Tuesday at a Senate Banking Committee hearing on new financial products, Sen. Sherrod Brown, D-Ohio, noted the benefits of plans that allow consumers to pay for things in installments. But he also criticized the way the industry is pushing the plans.

“Advertising encourages consumers to use these plans for multiple purchases across multiple online stores – accumulating debt they can’t afford to pay off,” Brown said.


Klarn phone app

Short-term loans are potentially problematic because they are not reported on a consumer’s credit profile with Transunion and Experian. In addition, buy now, pay later, industry customers misrepresent the young – this means that they have a small credit history. Hypothetically, a borrower could take out multiple short-term loans from multiple buy-now-pay-later companies—a practice known as “loan hoarding”—and they never show up on a credit report. If a person puts too many items into Buy Now, Pay Later plans, budgeting can be difficult.

“This is a blind spot for the industry,” Fitch’s Taiano said.

In a statement, industry trade group Buy Now, Pay Later dismissed claims that its products could saddle borrowers with too much debt.

“With zero or low interest rates, flexible payment terms and transparent terms, BNPL helps consumers manage their cash flow responsibly and lead healthier financial lives,” said Penny Lee, CEO of the Financial Technology Association.

Meanwhile, “buy now, pay later” service providers see the rise in delinquency as a natural consequence of growth, but also as a sign that inflation is hitting Americans, who are likely to use these services the most.

“We’re facing some stress (among those with the lowest credit scores) and they’re going through hard times,” said Max Levchin, founder and CEO of Affirm, one of the largest buy-now-pay-later companies.

“I wouldn’t call it some sort of preamble to a potential downturn, but it’s not as smooth sailing as it used to be,” he said, adding that Affirm is taking a more conservative approach to lending.


PayPal Logo

“Buy now, pay later” became popular in the US after the Great Recession. The product was largely untested during a period of great financial hardship, unlike mortgages, credit cards or auto loans, analysts say.

Despite these concerns, the consensus is that “buy now, pay later” companies will remain. Affirm, Klarna, Afterpay, owned by Block Inc., as well as PayPal and others, are now widely adopted in e-commerce.

In addition, the growth of the industry attracts more players. Tech titan Apple earlier this summer announced Apple Pay Later, where users can pay for purchases on a four-payment plan over six weeks.

“I usually schedule purchases that I make with PayPal Pay in 4 so that my payment due dates for purchases are the same as my due dates, as due dates are bi-weekly,” said Desiree Moore, 35, of Georgia.

Moore said she’s trying to use “buy now, pay later” plans to cover purchases that aren’t in her regular monthly budget so she doesn’t take money away from her kids. It is increasingly using plans with inflation making goods more expensive and can still keep up with payments.

Frances, a tech analyst, said it’s now common for her friends to pay their fares with credit in installments so they don’t run out of bank accounts in case of an emergency.

“If I get home from vacation and I have two flat tires and I just spent all that money on plane tickets, that’s $400 that you don’t have right now,” she said. “Most people don’t have savings. They are only enough for flat tires.