Last updated November 2022
Americans are increasingly turning to buy now, pay later (BNPL) installment plans to deal with the higher cost of living. Splitting a purchase into four equal payments paid over a six-week period (one payment now, then one every two weeks) has become an increasingly popular way to stretch budgets.
While BNPL companies market themselves as a smarter, more consumer-friendly way to pay, when consumers can’t make payments, these easy financing offers can result in costly fees and damaged credit.
“No Interest, No Fees”…Maybe Not So Much
“Buy now, pay later is only free if you follow all the rules, understand how it works, and make all your payments on time. And it’s easy to overextend yourself and mess up your budgeting, if you’ve got payments to different BNPL companies that come due at different times of the month.”
Robert Boyer, a construction worker in the Seattle area, knows all about that. Boyer needed expensive shoes for work but didn’t have $196 in his budget. So, he took advantage of a BNPL offer with Affirm that promised no interest. But Boyer lost track of the payments, and ended up paying $55 in late fees.
“The first payment is easy, but you forget about it,” Boyer told Checkbook. “It’s not like my credit cards. The bill isn’t coming next week. You have to remember it.”
Affirm eventually withdrew the entire balance due at once, without any notice.
“They just took it right out of my account. Bam. That really threw off all my budget, because they took such a large sum of money,” he said. “I’ll never do buy now, pay later again.”
A survey in March by Lending Tree, a financial services company, found that 42 percent of those who took advantage of buy now, pay later offers paid late fees. That means “a huge number of Americans are overextending themselves using these loans,” the report noted. “In a time of skyrocketing inflation, rising interest rates, and overall economic uncertainty, that’s a big deal.”
Except for accounts that go to collection, most buy now, pay later transactions are not reported to credit bureaus, so BNPL lenders have no idea how many other loans their customers have with other lenders or BNPL companies. And unlike credit card issuers, BNPL lenders don’t check whether potential borrowers have enough resources to repay their debt.
Affirm and Klarna, two of the largest BNPL companies, insist they only extend credit to those who can make the payments. Affirm said it uses continuous learning models to “assess the consumer’s repayment ability before making a real-time underwriting decision,” a spokesperson told Checkbook. Klarna said it has a number of safeguards in place to prevent consumers from taking on too much debt.
Both companies said they provide alternatives to revolving credit card debt. “Our BNPL products are not built on encouraging people to borrow as much as possible at the highest possible rate, like credit card providers,” Affirm’s spokesperson said.
Of course, you don’t pay interest to credit card companies if you pay off your bills in full each month. And credit card companies provide monthly statements for all purchases made, with clear due dates and notices of how much more you’ll owe if you don’t make payments on time.
Nadine Chabrier, senior policy council at the Center for Responsible Lending, worries about consumers who take out multiple BNPL loans.
“It’s easy to lose track, and you can quickly be in a situation where you have payments due all over the month,” Chabier told Checkbook. “You don’t get a statement, and you may end up getting overdraft fees if you don’t have enough money in your bank account. And this can make the product unaffordable for some people.”
Buy-Now, Pay-Later Is Now Mainstream
A few years ago, buy now, pay later was a niche product, used by those who could afford to pay in full but wanted to spread out payments, interest free, when they made expensive discretionary purchases, such as Peloton systems, high-end electronics, furniture, or vacations.
But now BNPL markets heavily to younger and less experienced consumers—as well as to those with little credit or subprime credit scores—who have few options if they want to spread out payments for large purchases.
Nearly 78 million Americans have used BNPL services within the past 12 months, according to a survey conducted in August by NerdWallet. Half of millennials in the U.S. and 44 percent of Gen Z (born between 1997 and 2012) have used pay-later services, the survey found.
NerdWallet also found those who used BNPL did so frequently—about six times over the one-year period, on average. This can result in having different loans from different companies all going at the same time. It’s called “stacking,” and it can lead people to overextend themselves.
“All of a sudden you have a whole bunch of bill payments to a bunch of different lenders, and it can be easy to lose track,” said Annie Millerbernd, NerdWallet’s personal loan expert. “Missing a buy now, pay later payment seems low stakes, but it can have high consequences.”
Most BNPL customers pay with debit cards and agree to have pay-later lenders use them to make automatic biweekly payments later on. If there’s not enough money in a checking account, BNPL lenders typically charge a late fee of $7 or $8 per missed payment. And if the electronic debit overdraws a checking account, the financial institution might charge its own overdraft fee.
If several BNPL lenders are making electronic debits at different times—without any advance notice—those with multiple pay-later purchases might find themselves in trouble very quickly.
Affirm and Klarna told Checkbook they have safeguards in place to make sure customers don’t take on too much debt, and they point to very low default rates. With Afterpay, if you miss a payment you cannot make new purchases.
But the delinquency rates for some BNPL services more than doubled from June 2021 to last March—from 1.7 percent to 4.1 percent with Afterpay, for example—according to a New York Times report. During that same time period, delinquency rates for major credit cards remained unchanged, at about 1.4 percent.
A Troubling Trend
Many Americans are increasingly relying on credit, including buy now, pay later, to help them deal with record inflation.
A survey in March by personal finance website Credit Karma found that 61 percent of consumers have used BNPL to pay for groceries, gas, and other basics—up from 44 percent in September 2021. More than half (53 percent) of those who used BNPL said they did so out of necessity.
Affirm and Klarna don’t see a problem with paying for basics, such as groceries, this way. Many people use credit cards to buy their groceries; this is just a low-cost alternative that doesn’t trap people in long-term debt, they said.
But personal finance experts find the trend is alarming: If a consumer spreads out the cost of a small bread purchase over four weeks, misses a payment, and gets hit with late fees, a $2 loaf of bread can wind up costing $10 or more.
Kathleen Dacy, an NFCC-certified credit counselor at American Financial Solutions, is seeing an increasing number of clients who are struggling with BNPL debt. Using pay-later services make it “very easy to overspend,” she said.
Many of Dacy’s clients are paying off four or five BNPL purchases at the same time. Because BNPL companies don’t do hard credit checks, their plans have become attractive options for people who are struggling financially, she said.
“It’s very easy to get these; the payments are small, so it feels like ‘I can handle another $25 bucks here and there,’” Dacy told Checkbook. “But if you have three or four of them, now you owe $100 or more. If you couldn’t afford the original purchase, you really can’t afford to pay additional fees and possibly interest on top of that.”
If you are struggling with debt, consider getting help from a social services agency or make an appointment with a nonprofit credit counselor. Look for a counseling agency that’s certified by the National Foundation for Credit Counseling; its website has an online directory, or you can call 800-388-2227.
Returns Can Be More Difficult
Using a BNPL service could make it more challenging to get help if you want to cancel a purchase, or are not satisfied with the merchandise you received. There’s now a third party, the BNPL service, between you and the retailer.
BNPL services do not provide the same legal protections—especially against fraud—as you get when you pay with a credit card. So, if something goes wrong with the purchase—such as damaged or defective merchandise, or you simply don’t like it—do you deal with the lender or the retailer?
This is creating “chaos for some consumers” when they want to return something or encounter other problems, according to Rohit Chopra, director of the Consumer Financial Protection Bureau (CFPB), the federal agency that regulates many financial products.
As BNPL sales have soared, so have complaints about lenders. In many cases, when customers have problems with purchases and want refunds, BNPL companies point to their refund policies, which state that their affiliated sellers are obligated to handle problems. But until refunds get approved, customers may be required to continue making payments.
The PIRG study released in March found that:
- Complaints to the CFPB have risen sharply from 2019 to the beginning of 2022.
- By issue, leading complaint categories were “incorrect information on your (credit) report,” “attempts to collect debt not owed,” and “problem with a credit reporting company’s investigation into an existing problem.”
The Better Business Bureau’s reports for Affirm, Afterpay, Klarna, Sezzle, and Zip, five major BNPL companies. As of Nov. 22, the BBB had received a combined total of 8,256 complaints closed in the last three years against these firms. Four of the five companies had average customer ratings ranging from 1.13 to 1.18 out of 5. (Zip’s reviews averaged 4.11 out of 5.)
Checkbook often recommends paying with a credit card (when possible) because if there’s a problem after the sale, federal law and credit card company policies allow you to dispute a transaction. In our experience, these “chargeback” requests are overwhelmingly approved. BNPL companies may not be as motivated to make you happy.
It’s All About Collecting Your Data
Most buy now, pay later companies count on fees paid by retailers when purchases get financed. They also make some money from late fees. But another important source of revenue is from selling their customers’ personal data to other companies. Because BNPL firms aren’t considered banks or financial institutions, there are few restrictions on what they’re allowed to do with data they collect.
The CFPB found during its study that BNPL companies are “harvesting and leveraging our data to grow revenue outside of their core lending business in ways that we do not see with other lending products.”
Credit card companies are also doing more with our data, but BNPL “is at a different level,” the CFPB report cautioned: “Using their proprietary interfaces, Buy Now, Pay Later firms can use our data to determine what products we see through paid product placement. This opens up the door to digital dark patterns, and even the potential to price products based on our behavior.”
The Center for Responsible Lending is also concerned about data collected when people use BNPL apps to make payments. “A lot of consumers just don’t know how much data is collected on them, and how it might be used to make them buy more,” the center’s Chabrier told Checkbook. “They may have your location data, your social media data, everything that you’re doing, where you are, where you go, where you spend your money. It’s all interconnected.”
BNPL Was Designed to Avoid Regulation and Consumer Protection Safeguards
While many Americans use BNPL in place of credit cards, they don’t get the same consumer protections as they do when using credit cards.
“This is shadow banking at its worst,” said Marshall Lux, a senior fellow at Harvard and author of Grow Now, Regulate Later? Regulation Urgently Needed to Support Transparency and Sustainable Growth for Buy-Now, Pay-Later. “The fact that it is almost completely unregulated is terrible.”
It seems like the financial technology (fintech) companies created buy now, pay later financing designed a financial product to avoid federal regulation, Lux told Checkbook.
“The fact that the Truth in Lending Act applies to five payments or more, and the most common form of [buy now, pay later] is four payments, says that someone thought carefully about how to construct this thing,” he said. “This is not technically classified as a loan, but for God’s sake, it’s a loan…and consumers need to be protected.”
The CFPB is clearly concerned about the explosion of BNPL financing. Even some credit card companies now offer this payment method to their cardholders many types of purchases.
In a report issued in September, the CFPB said the marketing of buy now, pay later loans “can make them appear to be a zero-risk credit option…despite the risk of consumer harm.” The report highlighted a number of concerns created by the lack of consistent consumer protections:
- Disclosures about the cost of credit are not standardized, as with other financial products.
- Customers are “forced” to opt-in to autopay.
- Some BNPL companies assess multiple late fees on the same missed payments.
- Should something go wrong, there are “minimal” dispute resolution rights.
- BNPL can result in consumers taking on more debt than they can handle.
“Buy now, pay later is engineered to encourage consumers to purchase more and borrow more,” the CFPB report noted. But since most BNPL lenders do not currently furnish data to the major credit reporting companies, both BNPL companies and other lenders “are unaware of the borrower’s current liabilities when making a decision to originate new loans.” As a result, BNPL payments “could have effects on other debts.”
Commenting on the report, CFPB Director Chopra said the agency would now consider potential rules to ensure BNPL firms “adhere to many of the baseline protections that Congress has already established for credit cards.”
Affirm and Klarna told Checkbook they’re already subject to some oversight and are comfortable operating in a regulated marketplace. Both companies said they support appropriate regulations that promote greater choice, competition, and transparency for consumers.
Use BNPL Wisely
As with any spending, don’t overdo it. Retailers that offer BNPL are hoping it will close more sales.
Remember, there are numerous buy now, pay later companies and plans, and the list keeps growing. Each has its own policies on fees and interest, returns, and dispute resolution. It’s easy to sign up for one of these loans without understanding all the terms. You must carefully evaluate any BNPL loans before agreeing to pay this way. Consider:
- Can I make the payments? If you’re already in debt or your income drops, do you really need an extra bill?
- What’s the cost of the loan? How does that interest rate compare to other options, such as your credit card? While some BNPL financing is interest-free, interest rates can be higher than with most credit cards, especially on travel purchases.
- What happens if I miss a payment? While some BNPL services don’t have late payment fees, others do. Will a late payment be reported to the credit bureaus? It could be, and that will damage your credit scores.
- How does this compare to other options? Do you have a rewards credit card? If you can pay off the bill in full when it arrives, you may be better off going that route. Taking an expensive cruise or need to buy a pricey computer or sectional? Some retailers and travel providers will also let you pay in monthly installments interest-free—just watch out for deferred interest come-ons that can be costly should you miss a payment or pay late.
- Shop around for the best price. Our researchers almost always find big price differences for the exact same merchandise and services. Don’t let financing offers dissuade you from finding the best deals—or persuade you to spend more than you can comfortably afford.
If you have a problem with a BNPL lender, file a complaint with the CFPB.
More Info: NerdWallet reviewed six BNPL plans and compared their payment plans, approval processes, payment schedules, and fees and interest charges.
Contributing editor Herb Weisbaum (“The ConsumerMan”) is an Emmy award-winning broadcaster and one of America's top consumer experts. He is also the consumer reporter for NW Newsradio in Seattle. You can also find him on Facebook, Twitter, and at ConsumerMan.com.