Consumer engagement with Buy Now, Pay Later (BNPL) services has seen a notable increase, particularly during the holiday shopping season, with online purchases exceeding $1 billion on Cyber Monday. While offering benefits such as ease of access and interest-free repayment options, financial experts highlight several associated considerations and potential risks for users.
Growing Adoption of Buy Now, Pay Later
Data from Adobe Analytics indicates that online purchases financed through BNPL services surpassed $1 billion on Cyber Monday, setting a new record. Projections from Adobe Analytics further suggest that total BNPL usage could reach $20.2 billion by the conclusion of the holiday season, representing an 11% increase from the previous year.
How Buy Now, Pay Later Functions
BNPL services allow consumers to acquire goods immediately and repay the cost over an extended period, often in installments. Prominent providers in this sector include Afterpay, Affirm, and Klarna. Factors contributing to the popularity of BNPL include its accessibility, the availability of interest-free periods for certain durations, and a lack of long-term commitment requirements. This payment method can facilitate larger or unexpected purchases and may be particularly appealing to individuals with limited or no credit history.
Considerations and Risks Associated with BNPL Use
Like other forms of credit, BNPL arrangements carry specific considerations and potential risks for consumers.
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Repayment Capacity: Financial experts advise individuals to assess their ability to cover the full loan amount before utilizing BNPL services. Lending institutions' willingness to provide a loan does not inherently confirm a borrower's capacity to repay. A 2023 report from the New York Federal Reserve indicates that BNPL users are often more financially vulnerable or exhibit financial fragility. Using BNPL for purchases that cannot otherwise be afforded is associated with higher risk, according to Felix Aidala, a former senior research analyst at the New York Federal Reserve.
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Management of Multiple Loans: Simultaneously managing multiple BNPL loans can lead to difficulties in tracking payment schedules and total outstanding debt. Each loan may feature different billing cycles and repayment terms, and some plans extending beyond six weeks may incur interest. The prevalence of autopay in BNPL arrangements can increase the risk of account overdrafts if funds are insufficient, potentially leading to bank fees. Experts, such as Lauren Saunders of the National Consumer Law Center, note the absence of a consolidated statement for multiple BNPL debts. Consolidating loans with a single provider is a suggested strategy to mitigate this complexity.
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Impulse Purchasing: The availability of installment payment options at checkout may influence purchasing decisions, potentially leading to acquisitions that might not otherwise occur. This can contribute to buyer's remorse, a sentiment reported by over one in four Gen Z BNPL users in a recent Bankrate survey. Presenting smaller installment amounts may obscure the total cost of a purchase. Bob Sullivan, a journalist, suggests that anticipating future payment obligations can assist consumers in making more informed decisions.
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Consumer Protection Discrepancies: BNPL loans typically do not offer the same level of consumer protections as credit card transactions. Credit cards often provide chargeback rights, allowing consumers to dispute charges for issues such as damaged or undelivered items. While many BNPL providers have return or dispute policies, consumers have reported instances where they remained responsible for payments even when issues arose with an order. BNPL lenders are subject to less stringent regulation compared to credit card issuers, which can impact recourse options for consumers in case of disputes.
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Credit Impact: Non-payment of a BNPL loan can result in the debt being sent to a collection agency. Such agencies may report to credit bureaus, potentially negatively impacting an individual's credit score. A 2023 LendingTree survey reported that 41% of BNPL users indicated experiencing a late payment in the preceding year.