As the holiday season approaches, a growing number of shoppers are turning to “buy now, pay later” (BNPL) services to manage their spending. With inflation still impacting household budgets and credit card debt at record highs, the flexibility of spreading payments over time has become increasingly attractive. However, while BNPL offers convenience, experts caution that it can also lead to financial trouble, especially when used alongside credit cards.
The Appeal of Buy Now, Pay Later
BNPL services are becoming a popular way for consumers to manage purchases, offering the ability to split payments into smaller installments. These plans are often interest-free or charge low fees, making them an appealing alternative to high-interest credit cards. According to Adobe Analytics, BNPL spending is expected to increase by 11.4% this holiday season, with shoppers projected to spend $18.5 billion using these services between November 1 and December 31. Cyber Monday alone is forecast to see $993 million in BNPL purchases.
Companies like Klarna, Afterpay, and Affirm dominate the market, attracting consumers with minimal credit checks and no immediate impact on credit scores. This makes BNPL particularly attractive to younger shoppers and those with limited or poor credit histories.
The Hidden Risks of BNPL
While BNPL services offer a convenient way to spread out payments, they also come with significant risks. Mark Elliott, Chief Customer Officer at LendingClub, notes that “people don’t think of it as debt — but it is.” The structure of BNPL plans can make shoppers feel like they have more financial leeway than they actually do, leading to overspending.
Consumer advocates warn that using BNPL in conjunction with credit cards can create a dangerous financial situation. If a consumer fails to pay off their BNPL installments on time, they may face additional fees and penalties, which can quickly accumulate. Furthermore, using a credit card to pay for BNPL purchases can result in interest charges on the credit card balance, creating a cycle of debt.
BNPL’s Influence on Spending Habits
Retailers benefit from BNPL services because they often lead to higher spending. Research from the Federal Reserve Bank of New York found that shoppers tend to spend 20% more when BNPL options are available. However, this ease of spending can encourage consumers to stretch their budgets too thin.
Emily Childers, a financial expert at Credit Karma, points out that credit card balances among younger shoppers—especially Gen Z and millennials—have increased by over 50% since March 2022, when the Federal Reserve began raising interest rates. “Young people are entering this holiday season already in the red,” Childers explains, “and they’re continuing to spend without fully understanding the long-term impact.”
Regulatory Changes and Consumer Protection
To address concerns, BNPL services are facing increased regulatory scrutiny. In May, the Consumer Financial Protection Bureau (CFPB) introduced new rules requiring BNPL providers to comply with standards similar to those applied to traditional credit. These changes aim to ensure consumers have more options to dispute charges and request refunds, enhancing protection for users of these services.
Despite these new protections, BNPL plans still carry risks. Late payments can lead to fees and even the suspension of a user’s access to the service. As with any form of credit, it’s crucial that consumers stay on top of their payment schedules.
Managing BNPL Carefully
Experts advise a cautious approach to using BNPL during the holiday season. For those already relying on revolving credit, taking on additional BNPL payments can further strain finances. Managing multiple BNPL plans across different providers can also make it difficult to keep track of payments, increasing the likelihood of missed deadlines and extra charges.
Elliott emphasizes moderation when using BNPL, saying, “It can be an innovative tool for purchases you’re going to make anyway. But the challenge is that it encourages overspending.”
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