Millions Use 'Buy Now, Pay Later' — Is It Really Saving You Money?

The Rise of "Buy Now, Pay Later" Financing in the United States

In recent years, a growing number of Americans have turned to "buy now, pay later" (BNPL) financing options to manage their purchases. According to a report from Capital One Shopping, nearly 87 million U.S. consumers used these plans in 2023, marking a 7% increase from the previous year. This trend has sparked both interest and concern among financial experts and everyday consumers.

How BNPL Works

BNPL services allow users to split the cost of a purchase into four installments, typically without any interest. These payments are often made over a few weeks or months, making it an attractive option for those who want to avoid large upfront costs. The process is straightforward—users can click to purchase a product and then make smaller, scheduled payments instead of paying the full amount at once.

Advantages of BNPL

One of the main benefits of BNPL is its accessibility. It provides an easy way for individuals with limited credit history or poor credit scores to make purchases without undergoing a lengthy application process. Donna Rasmussen, Executive Director of Consumer Credit Counseling of Northern Illinois, noted that this can be especially helpful for people who may not qualify for traditional credit cards.

Another advantage is the ability to break down larger expenses into manageable payments. For many, this can help with budgeting and financial planning. Rasmussen highlighted that the convenience of these plans makes them appealing, particularly for younger generations who are more comfortable with digital transactions.

Risks and Challenges

Despite the benefits, there are significant risks associated with BNPL. Kevin Brasler, Executive Editor of Consumer’s Checkbook, pointed out that these plans are available for almost any type of purchase, including essentials like groceries and gas. This broad accessibility can lead to what he calls "debt stacking," where users take on multiple BNPL loans simultaneously.

The consequences of missing payments can be severe. Late fees for BNPL services can reach as high as 36%, which can quickly spiral into a cycle of debt. Rasmussen explained that once someone starts racking up late fees, they may find themselves in a situation similar to payday loans, with no clear path to recovery.

Moreover, BNPL services lack the consumer protections that come with traditional credit cards. If a dispute arises, users may not have the same legal recourse as they would with a credit card company. Brasler emphasized that while some companies have started offering dispute resolution programs, there is no guarantee that they will resolve issues in the consumer's favor.

Why Younger Consumers Are Drawn In

Millennials and Gen Z consumers are particularly drawn to BNPL services due to their tech-savviness and ease of use. Rasmussen noted that these groups often rely on mobile banking apps and may not check their bank statements as frequently as older generations. This can lead to a lack of awareness about how many BNPL accounts they have open and when payments are due.

While BNPL was initially designed to help consumers buy big-ticket items, it is now being used for a wide range of purchases. Experts warn that using these services as a substitute for credit cards can lead to long-term financial problems if not managed carefully.

Expert Advice and Warnings

Financial experts advise users to approach BNPL services with caution. Brasler emphasized that while these plans may seem like a responsible alternative to credit cards, they still involve debt and carry risks if not paid on time. He recommended that users fully understand the consequences of missing payments and consider their financial situation before using these services.

Rasmussen echoed this sentiment, stating that the key to using BNPL responsibly is to be aware of the potential pitfalls and to ensure that payments are made on time. She also encouraged users to seek help from financial counseling services if they find themselves struggling with debt.

Industry Perspective

Representatives from the financial technology industry have defended BNPL services, highlighting their benefits for consumers. Miranda Margowsky, Head of Communications with the Financial Technology Association, stated that most users repay their BNPL loans on time and that providers offer reminders and accessible repayment plans. She also noted that there are no hidden fees and that users are more likely to continue using the service after positive experiences.

Resources for Financial Assistance

For those struggling with debt or seeking guidance on managing finances, several organizations offer support. These include:

• National Foundation for Credit Counseling: https://www.nfcc.org/
• Consumer Credit Counseling Service of Northern Illinois: https://www.illinoiscccs.org/
• Illinois Financial Wellness Hub: https://www.illinoistreasurer.gov/Financial_Education/IL_Financial_Wellness_Hub
• Consumer Financial Protection Bureau: https://www.consumerfinance.gov/

Consumers can also contact the CFPB at 855-411-2372 for additional assistance.