Buy Now, Pay Later: A Double-Edged Sword for Holiday Shopping

Will this holiday season be characterized by exuberant shopping or a descent into escalating debt? The answer may lie in the growing appeal of 'buy now, pay later.'

As the holiday shopping season approaches, an increasing number of Americans are turning to 'buy now, pay later' (BNPL) plans. With inflation impacting household budgets and credit card debt at record highs, spreading payments has become highly attractive. This trend is expected to reach unprecedented levels this year, reflecting how consumers navigate financial constraints while indulging in holiday spending.

Rising Popularity of BNPL

Adobe Analytics projects an 11.4% increase in holiday spending through BNPL compared to last year. Between November 1 and December 31, consumers are expected to spend $18.5 billion using these services. On Cyber Monday alone, BNPL purchases are anticipated to reach $993 million. The primary appeal of BNPL lies in its flexibility, especially for younger consumers or those with limited credit histories. Unlike traditional credit cards, BNPL services generally involve only soft credit checks and do not report loan details to credit bureaus, making it easier for individuals with lower credit scores to participate.

In May, the Consumer Financial Protection Bureau (CFPB) announced that BNPL companies must follow regulations similar to those governing traditional credit products, providing consumers with avenues to request refunds or dispute transactions.

How BNPL Works

To use BNPL, consumers provide their bank account details or a credit/debit card, agreeing to make payments in installments. These loans are often marketed as having low or no interest, with fees applied only for late payments. Prominent BNPL providers include Klarna, Afterpay, and Affirm.

However, consumer advocates warn that using a credit card for BNPL can lead to unintended costs. Interest charges on the credit card balance may accrue if it is not paid in full, adding to late fees or penalties from BNPL providers. Experts advise against using credit cards for BNPL payments for this reason.

Potential Risks and Challenges

BNPL plans can also lead to overextended budgets, as not paying the full price upfront may create an illusion of more disposable income, encouraging additional purchases. Consumers are advised to carefully track BNPL payments, as managing multiple plans can become challenging without centralized reporting like a credit card statement.

“Buy now, pay later can be an innovative tool for purchases you’re going to make anyway,” said Mark Elliott, Chief Customer Officer at LendingClub. “The challenge is that it does fuel overspending.”

Retailers are eager to offer BNPL as it tends to increase cart sizes and convert browsing into purchasing. Research cited by the Federal Reserve Bank of New York indicates that consumers spend, on average, 20% more when BNPL is available.

“The increased cost of living and inflation have placed more people in a position where they rely on revolving credit,” Elliott noted. “Consumers may not perceive BNPL as debt, but it is.”

The downside of BNPL is that missed payments can lead to fees, accrued interest, or losing access to the service. This risk is particularly significant during the holiday season, when spending tends to increase.

A Growing Concern for Younger Generations

Emily Childers, a consumer financial expert at Credit Karma, highlighted a concerning trend. Internal data from Credit Karma shows that since March 2022, credit card balances for Gen Z and millennial members have increased by over 50%.

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

The Bottom Line

The convenience of deferred payments, coupled with the need to manage household expenses, makes BNPL an attractive option for many. However, experts caution that these purchases still constitute debt that must ultimately be repaid. The risk of escalating debt is very real, particularly during the festive season when emotional spending peaks.

Retailers benefit from increased spending through BNPL, but the long-term consequences for consumers include mounting debt and financial stress if payments are mismanaged. As more individuals turn to BNPL, the importance of financial literacy and careful budget management becomes increasingly critical.

This holiday season will reveal whether BNPL serves as a helpful tool for managing expenses or a financial pitfall leading to greater debt. The outcome will depend on consumers balancing BNPL's convenience with the discipline needed to avoid overspending.