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Beware the Buy Now, Pay Later Debt Spiral


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Many shoppers are turned off by the thought of taking on more credit card debt. The risky proposition of increasing debt may be why shoppers have turned to point-of-sale (POS) financing – the technical term for Buy Now, Pay Later programs.

However, according to a study published by Credit Karma, one in three U.S. consumers have fallen behind on one or more of their “Buy Now, Pay Later” payments. And 72% said that their credit score declined as a result. Though many shoppers may jump at the chance to make purchases in installments, some are more concerned about the hidden fees and the hassles of recouping money for returned items.

What is Buy Now, Pay Later?

By now, you’ve probably noticed the financing options offered at checkout on most retailer websites. These financing options are referred to as Buy Now, Pay Later, or point-of-sale (POS), loans. They allow you to make purchases that you pay off in installments – typically four interest-free installments made biweekly. For impulsive shoppers, the allure of BNPL apps is the ability to break up payments into manageable bits.

In some cases, you apply for a one-time installment loan at checkout to break your payments into four equal installments. The best part? You’re likely to be instantly approved, unless you’ve had trouble with repaying a POS loan with that BNPL provider in the past.

Other instances, however, require you sign up with a payment platform that partners with a specific retailer. From there, you can choose a payment plan that fits your budget.

But be aware that BNPL lenders may not have consumers’ best interests at heart. They are aware that many people live paycheck-to-paycheck, and they may seek to take advantage of that with Buy Now, Pay Later loans. For many consumers, using BNPLs can feel less frightening than running up a credit card bill with a revolving balance.

The downside of Buy Now, Pay Later

Though BNPLs can be a practical solution, they often lead to more expensive purchases, which could lead to consumers facing a pile up of installment payments. According to Morning Consult, 35% of BNPL shoppers plan to spend $500 or more. Additionally, consumers using BNPLs to shop spend more than they originally planned.

While jingle-bells may ring in the short term, payments and reminders on BNPLs will run through the New Year and can lead to a debt hangover. What can happen is consumers don’t keep track of how much money they’ve spent, so they overestimate how many BNPL payments they’ll be able to afford. This leads to increased chances of missing payments. Paying off BNPL loans in the New Year can be just as much of a drag on your budget and 2022 financial goals as paying off credit card debt.

Who uses Buy Now, Pay Later apps?

According to a TransUnion survey of nearly 1,000 BNPL users found that the majority cited the ability to spread payments over time (29%) and easy application processes (13%) as their top reasons for using point-of-sale financing.

Because of Buy Now, Pay Later apps’ ever-growing popularity, it’s no wonder more investors are licking their chops at the opportunity to make money through BNPLs. Hence, Jack Dorsey’s digital payment company, Square, bought Afterpay, an Australian-based BNPL, for $29 billion. Afterpay is one of the leading BNPL apps on the market. And Jack Dorsey’s investment is paying off, as Afterpay reported an increase of 34% on orders both online and in-store during Black Friday and Cyber Monday.

According to C+R Research, 71% of consumers have been purchasing more items online since the pandemic, with 67% saying “more than half” of their shopping was done online within the last year. And just over half (51%) used a Buy Now, Pay Later service during the pandemic.

But while BNPL services have been a lifeline to people during the pandemic, it’s not all be good. More than half the consumers (59%) admit they made unnecessary purchases they would not have been unable to afford without BNPLs.

The most interesting statistic, however, was that 57% of consumers say they regretted making purchases through Buy Now, Pay Later apps.

Another concern is customers coming to rely on Buy Now, Pay Later. Much like using credit cards can become a habit that leads to overspending, so can BNPL. Almost half of consumers in the TransUnion survey (47%) said they use BNPL apps most of the time or every time they shop. So, it’s no surprise to find out about 56% have fallen behind on making installment payments.

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