This is a concern for economists and consumer advocates, who say that the increase in the use of these services, coupled with a lack of transparency and little regulatory oversight, leaves them wondering how much debt Americans are actually carrying.
While other household debt, such as credit card spending and auto loans, is collected and tracked by the Federal Reserve, Buy Now, Pay Later (BNPL) data is not included because funding is generally provided by non-bank sources and is not yet reported. comprehensively to the credit bureaus.
This means that there is no publicly available database of BNPL-related consumer debt levels, transaction volume, delinquency rates, fees and interest.
“There’s no question there’s a big hole in our understanding of people’s financial situation if you don’t include Buy Now, Pay Later,” said Matt Schulz, chief credit analyst for LendingTree. “And that’s a problem for credit reporting 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 figure that analysts say could skyrocket to between $1 trillion and $4 trillion by a few years. These services split a purchase into four or more installments over a period of weeks or months. They are typically offered with zero or minimal interest, and often come without a credit check.
A significant downside is the possibility of getting into debt quite easily without realizing it, said Terri R. Bradford, payment systems research specialist for the Kansas City Federal Reserve.
The remittance process makes it look like someone is paying next to nothing for the goods or services they acquire, she said.
“So it’s possible that you could, in your mind, think of everything you’re buying in four installments and therefore incur more debt than if you had to pay it in full every time,” she says .
“The possibility of piling up your debts using multiple Buy Now, Pay Later loans from multiple service providers is one of the biggest risks I see,” she added.
The three major credit bureaus have said they will begin including BNPL activity in credit reports, but they still have to rely on providers to obtain this information.
The Consumer Financial Protection Bureau said it plans to address those concerns, in addition to probing unclear terms, potential data collection and lack of other protections. The agency has gathered information from BNPL’s suppliers and plans to publish its findings later this year.
“With everything going on in the economy, it’s not getting the attention it deserves,” he said. “Meanwhile, the young and underbanked are being badly affected, which could ruin their credit for years to come.”
“People are buying more than they should, and they’re admitting it. Whether it’s aggressive marketing, impulse buying, a belief that ‘I’ll have more tomorrow,’ they use a lot. [services],” he said.
The biggest red flag for Lux, a former Chase chief risk officer, 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.”
means to an end
BNPL providers say they see their offerings as a safer and more sustainable option than traditional lines of credit.
“The product and the business, ultimately, are built entirely around the principle of long-term consumer success and the ability to repay,” said Libor Michalek, president of technology, risk and operations at Affirm. “And if they can’t, that’s where we share the negative result.”
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 perform strict eligibility checks on every purchase, constantly reassess our lending criteria and spending limits, and restrict the use of our services until ‘that missed payments are honoured.”
Some consumers use BNPL services in hopes of sticking to a budget or balancing their finances from month to month, said Charlotte Principato, financial services analyst for Morning Consult.
“What it signals to me is that it’s a means to an end,” she said. “It’s a thoughtful choice about how to make money a little further afield while achieving the goals you want and still getting the things you think you need.”
This is especially true for the plurality of Americans who don’t have a regular month-to-month paycheck, she said.
“They have to work with imperfect data on what their salary will be each month and manage to meet rather fixed expenses while making the 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, has a daily commute of 90 minutes. At home, she has three growing teenagers.
To help stretch her budget, she uses BNPL for discretionary purchases and for certain necessities, including a recent $400 grocery bill.
For Ramirez, splitting the costs through a Buy Now Pay Later app was a better alternative than putting the 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 good to know that if I ever find myself in a rut in the future, I can always use it again,” she said.
CNN Video’s Zach Wasser contributed to this report.
Correction: An earlier version of this article included incorrect estimates of the size of the BNPL industry. Transactions were expected to reach at least $100 billion in 2021.