The majority of individuals appreciate the convenience of buying now and paying later.
Installment payments have surged in popularity since the commencement of the coronavirus pandemic, coupled with an overall increase in online commerce.
Spreading the expense of a large-ticket purchase, like a Peloton, made financial sense at first, especially at 0% interest.
According to Experian, 4 in 5 U.S. consumers currently utilize BNPL for anything from clothing to cleaning supplies, and the majority of shoppers believe that purchasing now and paying later could eventually replace their usual payment method (likely, credit cards).
“It’s hard to buy anything these days without being asked if you want to pay overtime,” said Marshall Lux, a fellow at the Harvard Kennedy School’s Mossavar-Rahmani Center for Business and Government.
When buying online at companies like Target, Walmart, and Amazon these days, most consumers will notice a buy now, pay later option, and many providers are also releasing browser extensions that you can download and apply to any online purchase. Then there are the apps that allow you to use installment payments when purchasing items in person, just like Apple Pay.
“People were talking about Peloton bikes three years ago; now they’re purchasing sneakers, jeans, and socks,” Lux added. “It’s a concern when people start buying household products on credit.”
Furthermore, BNPL’s rapid expansion is predominantly driven by younger consumers, with two-thirds of BNPL borrowers classified as subprime, according to Lux, making them particularly exposed to economic shocks or a potential downturn.
He explained, “These are the individuals who can’t afford to be injured.”
According to a LendingTree survey, nearly 70% of purchases now, pay later customers to admit to spending more than they would if they had to pay for everything upfront.
According to LendingTree, 42 percent of consumers who have taken out a purchase now, pay later loan have made a late payment on one of those loans.
According to a separate survey by polling site Piplsay, Gen Zers are more likely to skip a payment and use BNPL for regular purchases rather than big-ticket products.
Depending on the lender, late fees, delayed interest, or other penalties may apply if you miss a payment. (CNBC’s Select includes a comprehensive list of costs, APRs, whether or not a credit check is completed, and whether or not the provider reports to credit scoring bureaus, in which case a late payment could negatively impact your credit score.)
“They won’t come for your sneakers,” Lux said, “but the idea that you may buy anything and not know what happens if you default is a concern for the typical person living paycheck to paycheck.” “It reminds me of the Wild West.”
According to Lux, the BNPL market is now in a “legal gray space” because of a lack of regulatory control.
He said, “Let’s stress-test this.” “It has the potential to blow out fairly substantially.”
The Consumer Financial Protection Bureau has launched an investigation into popular pay-later schemes.
The financial watchdog expressed concern over how these initiatives affect consumer debt accumulation, as well as what consumer protection regulations apply and how payment companies capture data.
In a statement, CFPB Director Rohit Chopra stated, “Buy now, pay later is the new version of the old layaway scheme, but with newer, speedier twists where the consumer receives the thing immediately but also gets the debt immediately.”
The Consumer Financial Protection Bureau has yet to declare its next measures.