Americans have learned to love “buy now, pay later” services, but for specific borrowers, the “pay later” portion is getting harder.
Buy Now Pay Later Loans
Loans that let you buy something and pay for it later allow you to pay for luxury products, technology, or brand-new footwear over time. Companies like Affirm, Afterpay, Klarna, and PayPal have developed well-liked financial solutions around these short-term loans, especially for younger borrowers and less likely to be concerned about mounting credit card debt.
The number of delinquencies is now increasing as the industry gains more clients. Consumers are being squeezed by inflation, which makes it harder to pay off debts. Some borrowers make poor financial decisions, especially if they are convinced to take out many loans, while others might have been credit risks in the first place.
Michael Taiano, an analyst with Fitch Ratings, co-wrote a report in July outlining some of the concerns within the industry. “You have an industry with a higher concentration of subprime borrowers in a market that hasn’t been effectively tested through (this type of economy), and you have a kind of toxic brew of concerns,” he said.
The most common kind of buy-now, pay-later loans allow for four payments spread out over six weeks, one at the time of purchase and the other three that are frequently coordinated with pay periods by the borrower. There are also longer-term loans available for more oversized items. The majority of short-term loans are interest-free. Businesses that do charge interest can express explicitly up front how much a borrower would be required to pay in financial fees.
Buy now, pay later plans were first viewed by consumer advocates and financial advisors as a potentially healthier type of consumer debt if appropriately utilized due to their aspects. The major worry had been late penalties, which, if a borrower is late with a payment, might function as a significant finance charge on a minor purchase. The costs may total up to $34 when interest is added. However, as criminal activity has increased and businesses have become more active in their product marketing, proponents believe that more regulation is necessary.
According to a report issued on Thursday by the Consumer Financial Protection Bureau, the sector is expanding quickly. In 2021, Americans borrowed around $24.2 billion through buy-now, pay-later programs, up from just $2 billion in 2019. It is only anticipated that this industry-wide number will rise much higher. In the first half of the year, international purchases made through Klarna’s service totaled $41 billion, an increase of 21% from last year. In the second quarter, PayPal processed more than $4.9 billion in purchases now, pay later transactions, more than double the amount from the prior year.
Jasmine Francis, a 29-year-old information analyst from Charlotte, North Carolina, claimed that she made her first purchase from the fast-fashion retailer Forever21 in 2018 using a buy now, pay later program.
She recalled, “I just had a cartful.” “At first, I assumed that something had to be returned, but then I noticed Afterpay at the checkout; you don’t pay for it all at once, but you get it all at once. That made my ears happy.
Uncertainty surrounds the usage of buy-now, pay-later loans by consumers. In contrast to credit card delinquencies, Fitch reported that delinquencies on these services increased significantly in the year ending March 31. And according to the CFPB, an increasing number of loans made by the industry are being charged off or are loans that are so past due that they are probably uncollectible. The charge-off rate for the sector was 2.39% in 2021; given the current economic uncertainty, this number is probably higher. This amount was 1.83% in 2020.
During a conference call with reporters, the CFPB’s Rohit Chopra stated that the “upward trend on delinquencies is continuing.”
TransUnion, a credit reporting agency, discovered that those who use purchases now pay later loans just as frequently as those who use credit cards by accruing debt on top of debt. According to a Morning Consult survey released this week, 15% of users of the buy now, pay later service use the program for everyday expenditures like groceries and petrol, which raises red flags for financial planners. A modest but rising percentage of Americans are using these items for regular transactions, according to CFPB research.
Andre Jean-Pierre, a former wealth advisor for Morgan Stanley who now owns a financial planning company dedicated to assisting Black Americans with proper budgeting and saving, said that if these buy now, pay later plans are not adequately planned for, they could have a cascading effect across a person’s entire financial life.
The simplicity with which customers can add these installment loans to their existing debt is a concern shared by advisors, consumer groups, and Washington legislators and regulators.
Because the short-term loans are not recorded on a consumer’s credit profile with Transunion and Experian, they could be troublesome. Additionally, customers in the buy now, pay later sector to tend to be young, which means they don’t have much credit history. In theory, a borrower might obtain several short-term loans from several purchases now, pay later lenders, a process known as “loan stacking,” and they wouldn’t reflect on their credit record. Budgeting could be challenging if too many products are put on buy now, pay later arrangements.
It’s a blind area for the sector, according to Taiano of Fitch.
The founder and CEO of Affirm, one of the most significant buy now, pay later businesses, Max Levchin, stated that “we have noticed some stress (among those with the lowest credit scores), and those are starting to have a hard time).
It’s not as smooth sailing as it once was, adding that Affirm is adopting a more conservative lending strategy. “I wouldn’t call it a prologue to a potential downturn, but it’s not the same kind of pleasant sailing it’s been,” he said.
Purchase now, pay later in the United States after the Great Recession. According to analysts, unlike mortgages, credit cards, or vehicle loans, the product has not been extensively tested through a significant period of the financial crisis.
Despite these reservations, it is widely believed that buy now, pay later businesses will continue to exist. The use of PayPal, Affirm, Klarna, Afterpay, which Block Inc. owns, and other services is now pervasive in online shopping.
Additionally, the industry’s expansion is drawing in additional participants. The tech giant Apple unveiled Apple Pay Later earlier this summer, allowing customers to spread out their purchases over a four-payment period of six weeks.
Sen. Sherrod Brown, a Democrat from Ohio, spoke at a Senate Banking Committee hearing on new financial products on Tuesday and emphasized the advantages of programs that let customers pay for items in installments. But he also has an issue with how the sector advertises the schemes.
According to Brown, advertisements “push consumers to use these programs for several purchases at numerous internet retailers, accruing debt they cannot afford to repay.”
While this is happening, companies that offer buy now, pay later services to see rising delinquencies as a natural byproduct of growth and a sign that inflation is particularly harsh on Americans who are most inclined to use these services.