NEW YORK– More customers than ever are on their way to using it Buy now, pay later plans this holiday season, as the ability to spread out payments seems attractive at a time when Americans are still feeling the lingering effect of inflation and already have record high credit card debt.
Data company Adobe Analytics predicts that shoppers will spend 11.4% more with Buy Now, Pay Later this holiday season than they did a year ago. The company predicts that consumers will purchase $18.5 billion worth of goods through its third-party services for the period November 1 through December 31, with $993 million in purchases on Cyber Monday alone.
Buy now, pay later may be especially attractive to consumers with low credit scores or no credit history, such as younger buyers, because most companies offering the service only run soft credit checks and do not report the loans and payment history to the credit bureaus, unlike credit card companies.
This holiday season: buy now, pay later, users can also feel more confident if a transaction goes wrong. In May the CFPB said buy now, pay later, businesses must follow different rules that govern traditional credit, such as providing ways to claim refunds and dispute transactions.
To use a ‘buy now, pay later’ plan, consumers typically sign up with bank account information or a debit or credit card, and agree to pay for their purchases in monthly installments, typically over eight weeks or more. The loans are marketed as requiring no or low interest rates, or only contingent fees, such as for late payments. Klarna, Afterpay and Affirm are three of the largest ‘buy now, pay later’ companies.
But consumer advocates warn that shoppers who sign up for the payment plans with a credit card could face more interest and fees. That’s because the customer is opening themselves up to interest on the credit card payment, if made month to month, on top of any late fees, interest, or penalties on the loan you buy now and pay for yourself later. Experts recommend against using a credit card to pay for these plans for this reason.
Consumer watchdogs also say the plans lead to consumers overextending themselves because, for example, not paying the full price up front, in the eyes of the consumer, means more money for smaller purchases. They also warn consumers to carefully monitor their use of multiple buy-now-pay-later services, as the automatic payments can add up and there is no central reporting like with 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 financial services firm LendingClub. “The challenge is that it fuels overspending.”
For traders, that’s part of the appeal. Retailers have discovered that customers They are more likely to have larger carts or to convert from browsing to checkout when you buy now, pay later is offered. A report from the Federal Reserve Bank of New York cited research showing that customers spend 20% more if they buy now and pay later.
“The reality is that the higher cost of living and inflation has put more people in a situation where they are already dependent on revolving credit,” Elliott said. “The psychographics of ‘buy now, pay later’ may be different – people don’t think of it as debt – but it is.”
If a consumer misses a payment, he may incur fees, interest, or the possibility of not being able to use the services in the future.
Emily Childers, consumer finance expert for tech company Credit Karma, says internal data shows that credit card balances of Gen Z and millennial members have increased more than 50% since March 2022, when the Fed began raising the interest rates.
“Young people are already entering the holidays in the red,” she says. “And based on what we see in the data, they continue to bury their heads in the sand and spend money.”
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