Some Americans are getting into money trouble with buy now, pay later financing

·4 min read

Caroline Hunt had always done a decent job managing her money and rarely bought things she could not afford. However, when the pandemic hit and she discovered buy now, pay Later financing, she found herself at home in her apartment in New York City making impulse buys online.

“I kept treating myself to things,” said the 26-year old marketer from New York City.

Hunt is one of the many millions of Americans (often millennials and Gen Z’s) who jumped on the buy now, pay later (BNPL) bandwagon during lockdown as e-commerce reached new heights.

And there’s no sign of BNPL services slowing down.

An advertisement for the Klarna Buy Now Pay Later app is visible in Broadway Plaza shopping center in Walnut Creek, California, November 24, 2021. (Photo by Smith Collection/Gado/Getty Images)
An advertisement for the Klarna Buy Now Pay Later app is visible in Broadway Plaza shopping center in Walnut Creek, California, November 24, 2021. (Photo by Smith Collection/Gado/Getty Images)

In fact, this year alone, consumers are expected to make $100 billion in "buy now, pay later" purchases via financial tech companies such as Klarna, AfterPay, and Affirm. That’s up from $24 billion in 2020 and $20 billion in 2019. By 2025, volume could increase up to 15 times its current level, according to Cornerstone Advisors.

BNPL providers, which are infiltrating the retail market through partnerships with merchants big and small, allow shoppers to split the cost of purchases into equal installment payments (typically four, with each payment covering 25% of the total transaction) over a period of time, with the first due at checkout.

“There’s nothing new about buying something and paying for it later. This is just another, more modern flavor of it, with the ‘new’ part being the ease of access because it’s less regulated than standard credit cards,” said Jeff Galak, associate professor of Marketing at Carnegie Mellon University. “There’s no interest, fees, or credit inquiries. In a perfect world, this is all great until one day it’s not.”

That ‘one day’ came to Hunt several times over. Not only did she overextend herself financially, which is common among users of BNPL, according to a survey from LendingTree, but she was also hit with countless fees and had her credit damaged when she got behind on her payments.

“They were threatening to send me into collections,” she said.

NEW YORK, NEW YORK - SEPTEMBER 09: A view of the Afterpay register during the REVOLVE Gallery NYFW Presentation And Pop-up at Hudson Yards on September 09, 2021 in New York City. (Photo by Bryan Bedder/Getty Images for REVOLVE)
A view of the Afterpay register during the REVOLVE Gallery NYFW Presentation And Pop-up at Hudson Yards on September 09, 2021 in New York City. (Photo by Bryan Bedder/Getty Images for REVOLVE)

A similar thing happened to 34-year old Steven Walker of Phoenix, Arizona.

“When the non-essential stores were closed, I bought about $200 worth of stuff online. I never got a notification about the last payment but when I took it up with customer service, all I got was one lame response after the next. In order to end this dispute, I had to pay both a late fee and a settlement fee," Walker said. "Last I checked, my credit score was down by 30 points.”

These stories are not unique, said Colleen McCreary, financial advocate at Credit Karma, a personal finance company. In fact, a recent Credit Karma survey found that 34% of buy-now-pay-later customers had missed at least one payment, and 72% of those users reported seeing their credit score drop afterward.

“While it’s always great to have another financial tool in the tool kit and [BNPL] is super-convenient if you stay on top of things, there are a lot of potential downsides to not paying attention,” said McCreary. "It’s on you, the end-user, to be responsible.”

That’s challenging, though, since these installment plans all work differently with varying terms and conditions, said Andrea Woroch, a consumer finance expert.

“Shoppers who don’t spend time to review the details when choosing BNPL can rack up costs without realizing it," Woroch said. "It’s easy to get confused and overlook hidden fees."

Portland, OR, USA - Oct 20, 2021: Assorted payment apps offering Buy Now Pay Later services are seen on an iPhone, including Afterpay, Affirm, Klarna, Sezzle, Zip (Quadpay), Perpay, and Tabby.
Oct 20, 2021: Assorted payment apps offering Buy Now Pay Later services are seen on an iPhone, including Afterpay, Affirm, Klarna, Sezzle, Zip (Quadpay), Perpay, and Tabby. (Photo: Getty)

For example, some charge late fees and some don’t. Some come with fixed fees added to your monthly payments, and some don’t. “Not everyone understands what they’re signing up for,” especially young users with little credit history or financial literacy, said McCreary.

“Consumers are also using a bunch of different payment plans simultaneously,” she added. “It’s a slippery slope when you mix and match. And it’s easy to get lost.”

And angry.

In fact, thousands of complaints - pertaining to surprise fees to fraudulent charges to difficulty getting refunds for returned merchandise - have been filed against BNPL providers with the Better Business Bureau.

Last week, the Consumer Financial Protection Bureau opened an inquiry into BNPL providers, collecting information from Affirm, Afterpay, Klarna, PayPal, and Zip

“We’re monitoring the market and trying to assess the trends to see whether any Bureau interventions are warranted,” said Laura Udis, program manager at the CFPB.

“The whole system is going through a gut check right now,” added McCreary.

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Personal Finance Journalist Vera Gibbons is a former staff writer for SmartMoney magazine and a former correspondent for Kiplinger's Personal Finance. Vera, who spent over a decade as an on air Financial Analyst for MSNBC, currently serves as co-host of the weekly nonpolitical news podcast she founded, NoPo. She lives in Palm Beach, Florida.