Advertisements for “buy now, pay later” services seem to be everywhere.
When consumers buy something online, even if it is relatively inexpensive, they will likely be offered such a service, also known as a “point-of-sale payment plan”. Many services require an upfront payment of 25% at the time of purchase, with the balance due in three remaining installments.
A provider in this vein is Affirm, which makes this pitch on its website: “Make 4 interest-free payments every 2 weeks. Ideal for everyday shopping. No interest or fees; no impact on your credit rating; set up simple and automatic payments.
Apple recently made headlines by announcing that it would soon launch a buy now, pay later program as part of its Apple Pay feature. But Apple and Affirm are far from the only companies launching new BNPL funding services. Other companies doing this include Afterpay, Zip (formerly known as Quadpay) and PayPal, with its “Pay in 4” service.
Advisers say these services could be helpful for some consumers, but they also come with risks, including overspending and late payment fees. Therefore, the growing popularity of these services begs the question: Should plan advisors be concerned that excessive leverage could harm plan participants’ savings rates and overall financial well-being?
American consumers are already deeply in debt
American consumers are carrying large and growing personal debt. According Experian Consumer Debt Review 2021, total consumer debt balances increased by 5.4% from 2020 to 2021, reaching $15.31 trillion. This is an increase of $772 billion and more than double the 2.7% increase from 2019 to 2020. (All statistics are from the third quarter of each year.)
Mortgages and car loans were the two largest components of the typical consumer’s budget, and the study found that these categories also grew the most over the past 12 months. Specifically, total mortgage balances increased 7.6% to a total of $10.29 trillion in 2021, and total auto loan and lease balances increased 8.9% to $1.47 trillion. of dollars. Student loan debt rose by a much more modest 1.9% to $1.6 trillion.
Despite the overall increase in debt levels, however, Experian reported that delinquencies remained low. The report cites three probable causes for this: a 4.2% increase in wages between September 2020 and September 2021; pandemic-related federal aid programs, including multiple stimulus checks and the ability of many borrowers to suspend debt repayments; and savings from refinancing mortgages at lower rates or on more favorable terms.
Who uses BNPL?
In this environment, BNPL attracts more users, but the evidence remains mixed as to which populations most often use the service.
In March 2022, LendingTree has studied the use of BNPL and found that 43% of Americans had used BNPL, down from 31% in the 2021 survey. Usage declined with age, ranging from a high of 58% with Gen Z to 22% among babies. -boomers. Notably, lower family income does not appear to make BNPL use more likely, at least in the LendingTree sample. For example, 39% of consumers earning less than $35,000 used such a service, while 50% of those earning between $50,000 and $74,999 did. In income brackets above that, use has declined; 41% of those earning $100,000 or more reported using BNPL’s services.
The May 2022 report from the Federal Reserve, “Economic Well-Being of American Households in 2021”, found a stronger link between income and BNPL use. According to the report, people with lower incomes and less education used BNPL more.
“About 13% of those with incomes below $50,000 used BNPL in the previous year, compared to 7% of those with incomes of $100,000 or more,” the Federal Reserve report said. “Similarly, 14% of those with less than a high school diploma used BNPL, compared to 8% of those with at least a bachelor’s degree.”
According to LendingTree, BNPL fees were most common for apparel, footwear and technology, while home decor items and accessories were also frequently purchased through BNPL services.
The LendingTree study highlights several potential strains that BNPL services can place on consumers’ finances, regardless of income level. Nearly 70% of all BNPL users admitted to spending more than they likely would have spent had they paid in full at the time of purchase.
“Put simply, BNPL is encouraging many people to buy things they can’t afford,” says Dani Pascarella, founder and CEO of financial wellness app provider OneEleven in New York. “Most of the time, these are spontaneous and discretionary purchases that otherwise would not have taken place. “
As the LendingTree report notes, however, that’s what these loans are for: they can extend a tight budget and are “more readily available to people with thin or bad credit and are less expensive than other options such as than a retail credit card or personal account. ready.”
This approach to using BNPL works smoothly, provided the borrower makes the payments on time, but this is not always the case. The LendingTree survey found that 42% of BNPL users had made a late payment on a loan, including 25% who were charged fees or interest due to the late payment and 17% who said they did not. not have been billed. Late fees and interest rates on missed payments vary between lenders, but they can be high. A recent NerdWallet review detailed rates and fees among the largest lenders.
The Consumer Finance Protection Board cites another risk. If a consumer has multiple purchases on multiple schedules with multiple companies, it can be difficult to know when payments are scheduled. And when there is not enough money in a consumer’s bank account, it can lead to charges by both the consumer’s bank and the BNPL provider. Because of the ease of obtaining these loans, consumers may end up spending more than expected, according to the CFPB.
The impact of BPNL, if any, on a borrower’s credit score varies by credit bureau. In an April 2022 working paper, Marshall Lux and Bryan Epps of Harvard Kennedy School reported that TransUnion and Experian plan to include BNPL data in credit reports. TransUnion is working with FICO and VantageScore to determine how best to include BNPL data in future credit score models.
In their analysis, Lux and Epps noted that including BNPL data could help generate better credit scores for consumers with no credit history and build credit for consumers with already weak credit. But the inclusion of these loans could harm a borrower’s credit rating, particularly if BNPL credit issuances are considered “single installment loan accounts” that are quickly opened and closed.
A crowding out effect
Sources agree that one of the main potential downsides of BNPL is the negative impact of higher consumer debt on financial health. It’s a crowding-out argument: more money spent on debt service means less money available in the budget for day-to-day expenses, savings, and other purposes.
“Debt is the number one barrier to saving for retirement and other important long-term financial milestones, such as home ownership or pursuing higher education,” says Pascarella, whose firm works on both the direct financial well-being of consumers and that of employers. . “Monthly debt payments can add up quickly and take a toll on a household’s budget. When you’re struggling to pay off your debts and afford the necessities each month, that immediate need for cash takes up all of your financial chunks, and saving for the distant future becomes an afterthought.
The growing availability of BNPL options could lead to more consumer debt, agrees Jill Gonzalez, a WalletHub analyst in Washington, DC. Additionally, since these programs typically do not run credit checks or report debts, there is a high risk of default. , She adds.
“Lenders are not able to verify this type of debt, which can cause them to underestimate the debt ratios of potential borrowers,” Gonzalez warns. “Another risk that results from these programs involves consumers racking up even more credit card debt to pay off their purchase now, pay installments later.”
If programs such as BNPL lead consumers to overreach, broader financial well-being could suffer, adds Nathan Vorris, director of investment, information and advisory services for Schwab Retirement Plan Services in Richfield, Ohio.
“We don’t see that right now, but theoretically, as people go into debt or pay off with these kinds of programs, problems can arise,” Vorris says.