This is a concern for economists and consumer advocates, who say the sudden rise in use of these services, combined with a lack of transparency and a lack of Regulatory oversight, makes them wonder how much debt Americans actually have.
While other household debts, such as credit card spending and auto loans, are collected and tracked by the Federal Reserve, buy now and pay later (BNPL) data is not included because the financing is typically provided by non-bank sources and is not yet reported in a comprehensive manner. to credit bureaus.
This means that there is no publicly available database of consumer debt levels related to BNPL, transaction volumes, late payment rates, fees and interest charges.
“There is no doubt that there is a huge gap in our understanding of people’s financial conditions, if you don’t include buy now, pay later,” said Matt Schulze, senior credit analyst at LendingTree. “This is a problem for credit companies, credit bureaus and lenders.”
From Affirm and Apple to PayPal and Zip, BNPL transactions are currently estimated at at least $100 billion a year — a number that analysts say could rise to anywhere from $1 trillion to $4 trillion within a few years. These services break your purchase into four or more payments in installments over a period of a few weeks or months. they usually Offered with no or minimal interest, and often come without a credit check.
An important downside is the chance of getting into debt fairly easily without realizing it, said Terry R. Bradford, a payment systems researcher at the Federal Reserve in Kansas City.
The installment process, she said, makes it seem as if someone is paying practically nothing for the goods or service they are getting.
“So the possibility is that, in your mind, you can think of everything you buy in those four installments, and as a result, you take on more debt than you would if you had to pay for it in full,” she said.
She added, “The opportunity to pile up your debt using ‘buy now, pay later’ loans through many service providers is one of the biggest risks I see.
The three major credit bureaus said they will begin to include BNPL activity in credit reports, but they still need to rely on providers of this information.
The Consumer Financial Protection Bureau said it plans to address those concerns, as well as investigate unclear terminology, potential data collection, and a lack of other protections. The agency is collecting information from BNPL providers and expects to publish its findings later this year.
“With everything going on in the economy, this is not getting the attention it deserves,” he said. “In the meantime, young people and people with weak banks are being hit hard, potentially destroying credit for years to come.”
“People are buying more than they should, and they admit it. Whether it’s aggressive marketing, whether it’s impulse buying, whether it’s a belief, ‘I’ll get more tomorrow,’ they use a lot of these [services],” He said.
The biggest red flag for Lux, the former chief risk officer at Chase, is what people buy with these services.
“They buy cleaning supplies, they buy socks, they buy sneakers, they buy everyday household items,” he said. When people start [using revolving credit for] Everyday purchases like groceries, you know there’s a problem.”
It means to the end
BNPL providers say they view their offering as a safer and more sustainable option than traditional lines of credit.
“The entire product and business is built around the principle of consumers’ long-term success and ability to pay,” said Libor Michalek, Affirm’s Head of Technology, Risk and Operations. “And if they can’t, that’s where we share the negative outcome.”
In an emailed statement in response to questions from CNN Business, a Klarna spokesperson wrote:
“Our interest-free products are designed to keep people out of debt. We run strict eligibility checks on every purchase, constantly reevaluate lending criteria and spending limits, and limit the use of our services until missed payments are met.”
Charlotte Principato, financial services analyst at Morning Consult, said some consumers use BNPL’s services in hopes of trying to stick to a budget or balance their finances from month to month.
“What it points to me is that it’s a means to an end,” she said. “It’s a thoughtful choice about how to make money and go a little further while still achieving the goals you want and still getting the things you feel you need.”
This is especially true of the plurality of Americans who don’t have consistent month-to-month salaries, she said.
“They have to work with incomplete data on what his salary will be every month and still be able to meet what kind of fixed expenses and still make discretionary purchases that everyone should be allowed to make,” she said.
No room for maneuver
The single mother, who lives in a small town in South Texas, takes 90 minutes each day. At home, she has three growing teens.
To help increase its budget, BNPL uses it for discretionary purchases and for some essentials, too, including a recent $400 grocery bill.
For Ramirez, spreading out the cost via the Buy Now Pay Later app was a better alternative to putting a tab on a credit card, taking out a loan, or forgoing a utility bill payment. If all payments are made on time, most BNPL services do not charge interest or late fees.
“I don’t want to do this forever, but it’s nice to know that if I ever find myself in trouble in the future, I can always use this again,” she said.
CNN Video’s Zach Wasser contributed to this report.
Correction: An earlier version of this article miscalculated the size of the BNPL industry. Transactions were expected to reach at least $100 billion in 2021.
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