But now that January is here and the other payments are starting, Andersen isn’t sure how she’ll pay it. She found herself buried under a mountain of small payments, wondering how she would cover her bills.
“I was definitely selling clothes,” Andersen told CNBC of the $1,700 she made from Buy It Now. “If I had to sell a pair of shoes to make a payment, I would do it.” “I’m definitely worried about (the payments). It’s definitely a concern and I’ll definitely have to find a way to get the money.”
Andersen is one of many Americans who turned to buy now, pay later to finance their holiday shopping last year to avoid credit card debt, but are now having trouble paying those bills.
In an era where persistent inflation and record-high interest rates are affecting the financial decisions of many shoppers, the service has helped fuel a boom in overall online spending that reached $222 billion from November 1 through the end of December. This season, buy now, pay later usage reached an all-time high, rising a staggering 14% from the previous year and contributing $16.6 billion in online spending.
Adobe said that on Cyber Monday alone, buy now and pay later usage rose nearly 43%.
“Sales, especially online sales, have likely been impacted somewhat by the use of buy now, pay later,” said Ted Rossman, senior analyst at Bankrate. “A lot of people are attracted to this financing method as an alternative to something like a credit card where the average interest rate is a record high of 20.74%. I would caution that you can still get into trouble when you buy now and pay later… It can still encourage you Overspending and kind of cheating yourself.”
The increase in use of the buy now, pay later option comes as credit card debt has reached a record high and delinquency rates have nearly doubled over the past two years. While delinquencies have been at historic lows during the COVID-19 pandemic, the rate of people who went more than 30 days without paying their credit card bill recently surpassed pre-pandemic levels, according to the Federal Reserve.
It’s hard to say how buy now, pay later fits into the country’s overall debt picture. The providers who offer the service typically do not disclose how often these bills go unpaid, and the debts are not reported to the credit bureaus. Klarna, PayPal and Afirm declined to share their delinquency rates with CNBC.
The short-term, high-speed nature of its buy now, pay later service makes traditional credit metrics less important, Affirm said. It writes off those unpaid loans within 120 days, which is why it doesn’t disclose its delinquency rates. It discloses other credit metrics for its long-term loans.
Klarna and Affirm previously told CNBC that their underwriting strategies ensure that only people who can repay short-term loans have access to the service because their business models won’t work if people repeatedly miss payments. While Klarna charges a late fee of up to 25% of the purchase price, according to a review of its terms and conditions, Affirm does not.
Klarna said the global default rate for its overall business including buy now, pay later is less than 1%. In the United States, 35% of consumers pay a company early.
The uncertainty surrounding the new service has created a so-called phantom debt phenomenon that has left economists, regulators and even shoppers concerned about the impact it could have on the economy.
“It’s just a mysterious cloud of debt,” Andersen joked. “No one really knows how it works, and it’s floating around all the time, and it sure feels like an impending housing crisis, almost like 2008 but for shopping.” “This is the myth that Klarna and PayPal are selling you, which is that you can have this lifestyle, you can have these things, but the reality is you can’t.”
Alina Fingal, a New Orleans-based financial coach and founder of The Organized Money, typically receives five or six emails at the beginning of January from people who overspent over the holidays and need help managing their finances.
This year, it was closer to 20 or 25.
“Most people have used all their cash, then they run out of money, then they put it on a credit card, and then if they max out their credit cards, they’ll go to other services like buy now, pay later,” Fingal said. CNBC.
Fingal said she spoke with one customer who had two expired credit cards and used two buy now, pay later cards, leaving her struggling to make payments.
“Because she was unable to afford it in the first place, this minimum payment leaves her struggling a lot to cover food costs and her regular bills for the month,” Fingal said. “So it creates this cycle that becomes harder and harder to break out of.”
While it’s unclear how often buy now pay later bills go unpaid, people who use them are more than twice as likely to default on another credit product, such as a car loan, personal loan or mortgage, according to a study 2023 from the Consumer Financial Protection Bureau. People who use the service also tend to have higher balances on other credit products and lower credit scores, according to the CFPB.
As more shoppers use these products, consumers are confused about how they feel about it. In the weeks following Christmas, some on the social media platform
Others called it “dangerous” and vowed to stop using it as a New Year’s resolution. At least one shopper said she had to use rent money to pay the bill to buy now, and pay the bill later.
“Buy now, pay later is brutal. It definitely is. But you have to be the bigger beast.” said Hensley Resiere, a loyal Klarna user, in response to the difficulties some shoppers are having with the service.
In an interview with CNBC, the 34-year-old refugee specialist from Jersey City, New Jersey, said: She said Klarna helped her provide an “amazing” Christmas for her family. But when she first started using the buy now, pay later option during the COVID-19 pandemic, she had trouble tracking payments and found herself hundreds of dollars overdrawn and crushed by fees.
“When I realized I could still get what I wanted, like designer items, and not have to pay the full purchase price right away, I lost my mind. … It was like a kid in a candy store,” Rezier recalls. “Let’s say Klarna gave me $1,000. And in my mind, I said, ‘Oh my God, this is free money.’ So I spent the whole thousand, and I forgot that I had rent, a car receipt, car insurance, all these bills, groceries, everything.”
Resiere was in a cycle where she had to wait for money to cover her overdraft fees. These days, she has a system to manage payments so they don’t interfere with her other bills.
“Even though I’m in my career now and of course I’m making more money, I’m definitely in favor of any way I can split my payments and not have to worry about bills,” Rizieri said. “It splits the payments so I don’t really feel it. Yes, I’m paying the same amount but the fact that it’s being spread out, it doesn’t hurt as much.”
Pranica Pride, a mother of three who lives in Birmingham, Alabama, and works in higher education, told CNBC that she used Afterpay and Block’s buy now, pay later service this Christmas to buy an ice maker, a PlayStation 5 and tickets to a Drake concert. . They use a variety of providers, depending on what the retailer offers. Pride said the service came in handy this Christmas because she waited until the last minute to start shopping and was reluctant to pay the full cost of purchases in one go.
“I’ve used it in the past, and it wasn’t as heavy as it was this time,” she said, adding that she made about $1,300 from buy now, pay off debt later over the holidays. “I didn’t really get into the holiday spirit until Christmas week. So it was kind of funny at the end when I was making all the purchases I was like, ‘Oh, I’m going to regret this in two weeks.'”
Pride said she’s never had a problem covering her purchases now and later payments, and usually uses the service around payday, so she knows she’ll have the money by the time the next payment rolls around. She appreciates the flexibility it provides her, but acknowledged it can promote overspending or get in the way of her larger financial goals. Without it, you probably wouldn’t buy as many discretionary items as you do.
“Every year I say I don’t want to move into the new year,” Pride said. “But somehow, he always comes with me.”
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