‘Buy now, pay later’ is more popular than ever. It can cost more than you think

NEW YORK —  More shoppers than ever are on track to use “buy now, pay later” plans this holiday season, as the ability to spread out payments looks attractive at a time when Americans still feel the lingering effects of inflation and already have record-high credit card debt.

The data firm Adobe Analytics predicts shoppers will spend 11.4% more this holiday season using buy now, pay later than they did a year ago. The company forecasts shoppers will purchase $18.5 billion worth of goods using the third-party services for the period Nov. 1 to Dec. 31, with $993 million worth of purchases on Cyber Monday alone.

Buy now, pay later can be particularly appealing to consumers who have low credit scores or no credit history, such as younger shoppers, because most of the companies providing the service run only soft credit checks and don’t report the loans and payment histories to the credit bureaus, unlike credit card companies.

This holiday season, buy now, pay later users can also feel more confident if a transaction goes awry. In May, the CFPB said buy now, pay later companies must adhere to other regulations that govern traditional credit, such as providing ways to demand refunds and dispute transactions.

To use a buy now, pay later plan, consumers typically sign up with bank account information or a debit or credit card, and agree to pay for purchases in monthly installments, typically over eight weeks or more. The loans are marketed as requiring no or low interest, or only conditional fees, such as for late payment. Klarna, Afterpay and Affirm are three of the biggest buy now, pay later companies.

But consumer advocates warn that shoppers who sign up for the payment plans using a credit card can be hit with more interest and fees. That’s because shoppers open themselves up to interest on the credit card payment, if the debt is carried month to month, on top of any late fees, interest, or penalties from the buy now, pay later loan itself. Experts advise against using a credit card to pay for these plans for this reason.

Consumer watchdogs also say the plans lead consumers to overextend themselves because, for example, not paying full price upfront leaves, in the shopper’s mind at least, more money for smaller purchases. They also caution consumers to keep careful track when using multiple buy now, pay later services, as the automatic payments can add up and there is no central reporting.

“Buy now, pay later can be an innovative tool for purchases you’re going to make anyway,” said Mark Elliot, chief customer officer at financial services company LendingClub. “The challenge is that it does fuel overspending.”

For merchants, that’s part of the appeal. Retailers have found that customers are more likely to have a larger number of items in their carts or to convert from browsing to checking out when buy now, pay later is offered. One report from the Federal Reserve Bank of New York cited research that found customers spend 20% more when buy now, pay later is available.

“The reality is that the increased cost of living and inflation have put more people in a situation where they’re already relying on revolving credit,” Elliot said. “The psychographics of ‘buy now, pay later’ may be different — people don’t think of it as debt, but it is.”

If a consumer misses a payment, they can face fees, interest or the possibility of being locked out of using the services in the future.

Emily Childers, consumer financial expert for personal finance technology company Credit Karma, said that internal data show member credit card balances are up more than 50% for Gen Z and millennial members since March 2022, when the Fed started raising interest rates.

“Young people are entering this holiday season already in the red,” she said. “And, based on what we’re seeing in the data, they’re continuing to bury their heads in the sand and spend.”

Lewis writes for the Associated Press.