“The Rise and Pitfalls of Buy Now, Pay Later: Americans Struggle to Repay Holiday Debts”
As the holiday season approached last year, many Americans found themselves facing financial constraints that made it difficult to buy gifts for their loved ones. In search of a solution, they turned to a novel concept: buy now, pay later. This service allowed them to split their purchases into four interest-free payments, providing some relief during a time of increased spending. However, as January arrived and the payment installments began, many individuals like Kiki Andersen from Los Angeles found themselves overwhelmed by mounting debts and uncertain about how they would cover their bills.
Andersen, a 31-year-old comedian, had accumulated approximately $1,700 in buy now, pay later debt. She resorted to selling clothes to make payments, highlighting the anxiety and concern that many Americans are currently experiencing. The allure of avoiding credit card debt during the holiday season led to a surge in buy now, pay later usage, contributing $16.6 billion to online spending from November 1 through December. On Cyber Monday alone, the use of this service spiked by nearly 43%.
Ted Rossman, a senior analyst at Bankrate, acknowledged that buy now, pay later played a significant role in boosting sales, particularly online sales. Many individuals are drawn to this financing method as an alternative to credit cards, which often come with high-interest rates. However, Rossman cautioned that buy now, pay later can still lead to overspending and financial trouble if not managed properly.
The rise in buy now, pay later usage coincides with record-high credit card debt and increasing delinquency rates. While delinquencies were at historic lows during the Covid-19 pandemic, the Federal Reserve reports that the rate of people failing to pay their credit card bills for more than 30 days has surpassed pre-pandemic levels. The impact of buy now, pay later on the overall debt picture remains unclear, as providers do not disclose delinquency rates or report the debts to credit bureaus.
The lack of transparency surrounding this service has given rise to what economists, regulators, and shoppers refer to as a “phantom debt phenomenon.” The uncertainty surrounding buy now, pay later and its potential consequences for the economy has raised concerns among consumers. Andersen humorously compared it to a pending housing crisis, reminiscent of the 2008 financial crisis. The promise of a convenient lifestyle and the ability to acquire desired items without immediate payment can be enticing, but the reality is often different.
Alaina Fingal, a financial coach from New Orleans, has witnessed an increase in the number of people seeking help with managing their finances after overspending during the holidays. Many individuals exhaust their cash reserves, max out credit cards, and turn to buy now, pay later as a last resort. This cycle creates a growing burden that becomes increasingly difficult to escape.
A 2023 study from the Consumer Financial Protection Bureau reveals that buy now, pay later users are more likely to be delinquent on other credit products and tend to have lower credit scores. While some shoppers express gratitude for buy now, pay later, acknowledging that it enabled them to purchase holiday gifts they otherwise couldn’t afford, others view it as dangerous and have made resolutions to stop using it. Some individuals have even resorted to using their rent money to pay off their buy now, pay later bills.
Despite the potential pitfalls, there are also success stories. Hensley Resiere, a loyal Klarna user from Jersey City, New Jersey, credits the service with providing an amazing Christmas for her family. However, she initially struggled to keep track of payments and found herself overwhelmed with fees and overdrafts. Resiere has since developed a system to manage her payments effectively without compromising her other financial obligations.
Branika Pride, a mother of three from Birmingham, Alabama, used buy now, pay later services to purchase gifts for her children this Christmas. While she acknowledges the flexibility and convenience it offers, she also recognizes that it can lead to overspending and hinder her larger financial goals. Pride admits that she often carries buy now, pay later debts into the new year, despite her intentions to avoid doing so.
As Americans navigate the aftermath of holiday spending and grapple with buy now, pay later debts, the long-term impact of this financing method remains uncertain. The lack of transparency and reporting of delinquency rates raises concerns about the potential consequences for individuals and the economy as a whole. While buy now, pay later can provide temporary relief and flexibility, it is crucial for consumers to exercise caution and ensure they can manage their debts effectively.