“Buy now, pay later” is more popular than ever. It may cost more than you think

NEW YORK (AP) — More shoppers than ever are on track to take advantage of buy now, pay later plans this holiday season, given the ability to spread out payments at a time when Americans are still Feeling the ongoing effects of inflation, having record high credit card debt seems attractive.

Data firm Adobe Analytics predicts shoppers will spend 11.4% more using buy now, pay later this holiday season than they did a year ago. The company predicts that shoppers will purchase $18.5 billion worth of goods through third-party services from November 1 to December 31, including $993 million worth of purchases on Cyber ​​Monday alone .

Buy now, pay later can be particularly attractive to consumers who have low credit scores or no credit history, such as younger buyers, since most companies that offer this service only perform soft credit checks and do not report credit and payment histories Credit reporting agencies, as opposed to credit card companies.

This holiday season, Buy Now Pay Later users can also be more confident if a transaction goes wrong. In May, the CFPB said buy-now-pay-later companies must comply with other rules that apply to traditional loans, such as providing ways to request refunds and dispute transactions.

To use a buy now, pay later plan, consumers typically sign up with their bank account information or a debit or credit card and agree to pay for purchases in monthly installments, usually over a period of eight weeks or longer. The loans are marketed as requiring little or no interest or only conditional fees, such as late payments. Klarna, Afterpay and Affirm are three of the largest buy now, pay later companies.

But consumer advocates warn that buyers who take out payment plans by credit card will face higher interest rates and fees. This is because the buyer will have to pay interest on the credit card payment if it is made month to month, in addition to any late fees, interest or penalties from the buy now, pay later loan itself. This is why experts advise against it from using a credit card to pay for these plans.

Consumer watchdogs also say the plans leave consumers overextended because, for example, not paying the full price up front leaves more money left over for smaller purchases, at least in the shopper’s mind. They also warn consumers to pay careful attention when using multiple buy now, pay later services because 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 there is overspending.”

For retailers, that’s part of the appeal. Retailers have found that when given the “buy now, pay later” option, customers are more likely to choose larger carts or switch from browsing to paying. A report from the Federal Reserve Bank of New York cited a study that found customers spend 20% more when “buy now, pay later” is available.

“The reality is that the increased cost of living and inflation have put more people in a situation where they already rely 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 what it is.”

If a consumer misses a payment, they may face fees, interest, or the possibility of being unable to use the Services in the future.

Emily Childers, consumer finance expert at personal finance technology company Credit Karma, said internal data shows Gen Z and Millennial members’ credit card balances have increased by more than 50% since March 2022, when the Fed began raising interest rates .

“Young people are already in the red heading into this holiday season,” she said. “And according to the data, they continue to bury their heads in the sand and spend money.”