Buy Now Pay Later

Art by Bill Mayer

BNPL—buy now pay later—seems to be everywhere. Buy something online—even a relatively small purchase—and you will probably be offered a point-of-sale installment plan, typically with 25% required at the time of purchase and the balance due in three remaining payments. BNPL-provider Affirm’s website pitch is typical: “Make 4 interest-free payments every 2 weeks. Great for everyday purchases. No interest or fees; no impact on your credit score; set up easy, automatic payments.”

Apple, too, recently announced it was launching a BNPL program within its Apple Pay feature. Other companies offering the services are Afterpay, Zip (formerly known as Quadpay) and PayPal’s “Pay in 4.”

Yet, while potentially useful for some consumers, BNPL also carries risks, including those of overspending and incurring overdue payment costs. This could be a matter of concern to plan advisers, sources suggest: BNPL debt could dampen participants’ savings rates and financial wellness.

American consumers already hold a large and growing amount of personal debt. According to Experian’s “Consumer Debt Review 2021,” “[from 2020 to 2021], total consumer debt balances increased 5.4% to $15.31 trillion, a $772 billion increase—and [is] more than double the 2.7% increase from [Q3] 2019 through [Q3] 2020.” Student loan debt, for just one example, grew by 1.9% to $1.60 trillion.

Who Is Using BNPL?

In March, LendingTree surveyed BNPL usage and found that 43% of Americans had tried the method, up from 31% in the 2021 survey. Usage declined with age, ranging from a high of 58% with Generation Z to 22% among Baby Boomers. Common BNPL charges were for clothing, shoes and accessories—50%, 29% and 22%, respectively, of all such purchases. Technology (33%) and home décor (25%) were also popular.

While Lending Tree found that household income had little effect, a Federal Reserve report from May, “Economic Well-Being of U.S. Households in 2021,” discovered a stronger link. “Around 13% of those with income below $50,000 used BNPL in the prior year, compared with 7% of those with an income of $100,000 or more. Similarly, 14% of people with less than a high school degree used BNPL, compared with 8% of those with at least a bachelor’s degree.”

BNPL’s Risks

The LendingTree study highlighted several potential strains on consumers’ finances. Nearly 70% of BNPL users admitted making frivolous purchases, and thus increasing their spending. “Put simply, BNPL is encouraging many people to buy things they can’t afford,” says Dani Pascarella, founder and CEO of financial wellness app provider OneEleven. “Usually, these are spontaneous, discretionary purchases that otherwise would not have happened.”

As the LendingTree report notes, though, that is the point of these loans: They can extend a tight budget and are “more easily available to folks with thin credit or bad credit and are cheaper than other options such as a retail credit card or a personal loan.”

This aspect of using BNPL works without problems, provided the borrower makes timely payments. But often that is not the case. According to the LendingTree survey, 42% of BNPL users had made a late payment, and 25% consequently were charged a fee or interest. Late fees and interest rates on missed payments vary among lenders, but they can be high. A recent NerdWallet review detailed rates and fees among the largest lenders.

The Consumer Finance Protection Board cites another risk. If a consumer has multiple purchases on multiple schedules with multiple companies, it may be hard to keep track of when to pay whom. And when there is too little money in a consumer’s bank account, this can result in charges by both the person’s bank and the BNPL provider. Because of the ease of procuring these loans, consumers can end up spending more than anticipated, the CFPB observed.

BPNL’s impact, if any, on a borrower’s credit score depends on the particular credit bureau. In a working paper from April, Marshall Lux and Bryan Epps at the Harvard Kennedy School reported that TransUnion and Experian plan to include BNPL data on credit reports. TransUnion is working with both FICO and VantageScore to determine how best to include BNPL data in future credit score models.

Lux and Epps pointed out that including such data could “help generate scores for consumers without a credit history and help build credit for consumers with existing weak credit.” But including these loans could actually damage a borrower’s credit score, particularly “if issuances of BNPL credit are considered single-installment loan accounts that are quickly opened and closed.”

A Crowding-Out Effect

Sources agreed that a major potential downside to BNPL is the negative impact of higher consumer debt on financial health. It is a crowding-out argument: More money spent on debt service means less available in the budget for meeting everyday expenses, saving and other goals. “Debt is the No. 1 barrier to retirement savings and other important long-term financial milestones, such as homeownership or the pursuit of higher education,” Pascarella says. “Monthly debt payments can add up quickly and strain a household’s budget. When you’re struggling to pay off your debts and afford necessities each month, that immediate cash-need takes up all your financial mindshare, and saving for the distant future becomes an afterthought.”

Goodbye, Visa?

 of users said Buy Now Pay Later will eventually replace credit cards.

Source: C&R Research