Buy Now, Pay Later Plans Gain Popularity Amid Inflation
Increased Spending Expected this Holiday Season
More shoppers than ever are on track to use ‘buy now, pay later’ plans this holiday season, as the ability to spread out payments looks attractive at a time when Americans still feel the lingering effect of inflation and already have record-high credit card debt. The data firm Adobe Analytics predicts shoppers will spend 11.4% more this holiday season using buy now, pay later than they did a year ago. The company forecasts shoppers will purchase $18.5 billion worth of goods using the third-party services for the period Nov. 1 to Dec. 31, with $993 million worth of purchases on Cyber Monday alone.
Appeal to Consumers
Buy now, pay later can be particularly appealing to consumers who have low credit scores or no credit history, such as younger shoppers, because most of the companies providing the service run only soft credit checks and don’t report the loans and payment histories 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 awry. In May, the CFPB said buy now, pay later companies must adhere to other regulations that govern traditional credit, such as providing ways to demand refunds and dispute transactions.
How it Works
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 purchases in monthly installments, typically over eight weeks or more. The loans are marketed as requiring no or low interest, or only conditional fees, such as for late payment. Klarna, Afterpay, and Affirm are three of the biggest buy now, pay later companies.
Risks and Drawbacks
Consumer advocates warn that shoppers who sign up for the payment plans using a credit card can be hit with more interest and fees. That’s because individuals open themselves up to interest on the credit card payment, if it’s carried month to month, on top of any late fees, interest, or penalties from the buy now, pay later loan itself. Experts advise against using a credit card to pay for these plans for this reason. Consumer watchdogs also say the plans lead consumers to overextend themselves because, for example, not paying full price up front leaves, in the shopper’s mind at least, more money for smaller purchases. They also caution consumers to keep careful track of using multiple buy now, pay later services, as the automatic payments can add up, and there is no central reporting, such as with a credit card statement.
Merchants’ Perspective
For merchants, that’s part of the appeal. Retailers have found that customers are more likely to have bigger cart sizes or to convert from browsing to checking out when buy now, pay later is offered. One report from the Federal Reserve Bank of New York cited research that found customers spend 20% more when buy now, pay later is available.
Conclusion
Buy now, pay later plans may offer a tempting solution for shoppers looking to spread out payments, but it’s essential to be aware of the potential risks and drawbacks. Consumers should carefully consider the terms and conditions of the plan, and be cautious of using credit cards to pay for these plans.
FAQs
Q: What are buy now, pay later plans?
A: Buy now, pay later plans allow consumers to purchase goods or services and pay for them in installments over time, often with minimal or no interest.
Q: Are buy now, pay later plans safe?
A: Buy now, pay later plans are generally considered safe, but consumers should be aware of the potential risks and drawbacks, such as late fees and interest charges.
Q: Can I use a credit card to pay for buy now, pay later plans?
A: Yes, but consumer advocates advise against it, as it can lead to additional interest and fees.
Q: How can I avoid overspending with buy now, pay later plans?
A: Consumers should carefully track their spending and payments, and avoid using multiple buy now, pay later services.
Q: Are there any regulations governing buy now, pay later plans?
A: Yes, the CFPB regulates buy now, pay later companies, requiring them to provide ways to demand refunds and dispute transactions.
