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“Buy now, pay later,” or BNPL, financing has gained growing popularity in the United States amid high financing costs, but users have experienced friction related to such services, from overspending to missed payments.
Consumers can use a BNPL service, which state (NASDAQ:AFRM), PayPal (NASDAQ:PYPL), Block (NYSE:SQ) and PROG (NYSE:PRG) all offer the ability to make purchases and pay for them over time. Similar to a personal loan, BNPL plans allow users to split payments for a product or service into equal installments over a period of time, often without having to pay interest as long as payments are made on time and in full.
BNPL supporters argue that the payment option allows for greater access to credit and financial inclusion among consumers, as the requirements for the service are quite flexible. “But easy access to credit and a small payment facility is not without flaws,” Bankrate said in a survey released last week.
Approximately 56% of BNPL users reported experiencing at least one issue while using the service. Overspending was the biggest problem among respondents at 29%, followed by difficulty getting a refund (18%) and missed payments (18%), said Bankrate, which had commissioned YouGov Plc to conduct the survey between 4 and 6 March 2024.
“While buy now, pay later can be a helpful way to spread the financial impact of a large purchase, it is also a slippery slope that can lead to overspending,” commented Ted Rossman, senior industry analyst at Bankrate. “Many people have multiple BNPL plans active at the same time, which can add up quickly.”
The survey showed that the two biggest benefits of using BNPL include the ability to stretch cash flow and low or no interest rates on loans. For some, BNPL loans are a preferred alternative to traditional credit cards, “because if you’re late on a BNPL payment, it probably won’t hurt your credit score, at least until you’re actually late,” he pointed out Rossman. 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 bureaus until the borrower is 90 days past due. Conversely, a 30-day late payment on a credit card can result in a substantial drop in a user’s credit score.
It makes sense that BNPL usage has been on the upswing in recent years, as the Federal Reserve is keeping its benchmark rate at its highest level in two decades to further contain lingering inflation. Even as the tightening cycle continues, price pressures persist, and the labor market and economic growth are proving resilient, giving the central bank more reason to keep rates higher for longer. Logically, a prolonged period of higher borrowing costs would likely push consumers, especially those cash-strapped or indebted, to turn to alternative payment methods such as BNPL in an attempt to make ends meet.
To be sure, New York Fed economists analyzed in a survey last year that looked particularly at BNPL, finding that low-income individuals were among those likely to use the payment option. Specifically, BNPL usage was high for those with credit scores below 620; those who have been delinquent for more than 30 days in the past year; and those who applied for a different type of credit in the past year and were rejected.
“BNPL could attract consumers who already have financial difficulties and are struggling to pay existing bills and debt payments,” they wrote. “We cannot ignore the potential risks of overextension, whereby frequent use of BNPL financing leads to excessive debt accumulation over time, affecting the consumer’s ability to meet non-BNPL obligations.”