More Shoppers Expected to Use ‘Buy Now, Pay Later’ Plans 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.
Rise in Popularity
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 with Low Credit Scores
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.
Risks Associated with Using Credit Cards
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. However, consumer advocates warn that shoppers who sign up for the payment plans using a credit card can be hit with more interest and fees. 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.
“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 company LendingClub. “The challenge is that it does fuel overspending.”
Appeal to Merchants
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.
If a consumer misses a payment, they can face fees, interest, or the possibility of being locked out of using the services in the future.
This holiday season, it’s essential for consumers to understand the risks associated with buy now, pay later plans and to carefully consider whether using these services aligns with their financial goals.
- How does buy now, pay later work?
Typically, consumers sign up with bank account information or a debit or credit card and agree to pay for purchases in monthly installments, often over eight weeks or more.
- Are there any fees associated with using buy now, pay later?
Most plans market themselves as requiring no or low interest, but there may be conditional fees for late payments.
- Will using buy now, pay later affect my credit score?
Most buy now, pay later companies only run soft credit checks, and their payment histories are not typically reported to the credit bureaus.
- Can I use multiple buy now, pay later services?
Care should be taken not to accumulate multiple automatic payments, as there is no central reporting.
