“Buy Now, Pay Later” Plans Have Gained Popularity Despite Notable Risks

By Noah Rothstein

“Buy now, pay later” (BNPL) payment options have become increasingly popular among younger consumers, yet analysts warn of default risks given the lack of credit checks and “opaque” debt reporting.

Using this option could lead to a lack of credit history, meaning that lenders may underestimate a borrower’s debt levels when assessing new loan applications. There’s also a risk that consumers can build up credit card debt to pay off their BNPL obligations.

According to an Adobe analysis, BNPL in the U.S. grew 215% year over year in the first two months of 2021. Lenders partnered with retailers like Macy’s, Walmart, and Peloton to offer their services.

Stephen Biggar, director of financial institutions research at Argus Research, warned that defaults are “one of the primary risks.”

“These companies are not doing any kind of credit background check on these individuals,” he told CNBC’s “Squawk Box Asia” last week. “During a downturn, they may be the first to buy now and not pay later.”

Another risk of BNPL is potentially overspending. Two-thirds of those who have used the option said it caused them to spend more than they would have otherwise, a LendingTree survey of 1,040 Americans found. Almost half responded that they would not have made their purchase if they did not have the option to finance.

BNPL plans can now straddle between credit cards and installment plans, where online purchases can be as low as $10 or $20 or as high as thousands of dollars.

BNPL loans have interest rates similar to retail credit cards, which means the annual percentage rate could be as high as 30%. However, some offer promotional interest-free installments.

“If you pay your balance off on time, in accordance with the installment plan, then these things can be really, really cheap and basically interest-free,” Matt Schulz, chief industry analyst at LendingTree, said. “When you don’t pay it on time, or you make some other mistake, that is when things can get a little dicey.”

More established financial companies have joined in on the BNPL trend too. PayPal, Mastercard, American Express, Citi, and J.P. Morgan Chase are all offering comparable loan products, while Apple is reportedly looking into offering the service as well.