As financial challenges persist for many Americans, a Federal Reserve Bank of New York research report highlights the increasing reliance on buy now, pay later (BNPL) services by financially vulnerable consumers. Those considered financially fragile, with a credit score under 620 or recent credit challenges, were nearly three times more likely to use BNPL five or more times in 2023 compared to financially stable consumers.
The research indicates that financially vulnerable households, facing difficulties affording smaller, unexpected expenses, are turning to short-term installment loans at a higher frequency. Concerns are raised about the potential risks of overextension, particularly as BNPL, largely unregulated, gains broad popularity.
BNPL services, also known as point-of-sale installment loans, offer short-term fixed-payment loans. Major retailers, including Walmart, Amazon, and Trader Joe’s, offer BNPL at checkout through apps like Affirm, Klarna, Afterpay, and PayPal. These services allow users to make interest-free payments over several weeks.
While BNPL can be an alternative to credit cards, with most services conducting soft credit checks, risks exist. Longer-term BNPL loans may have high APRs, and major players may not report to national credit bureaus, creating potential risks for banks unaware of users’ financial situations.
Financially vulnerable consumers are utilizing BNPL for everyday necessities, including groceries, amid rising costs. A survey found that 56% of consumers using BNPL during summer 2023 used it for groceries. Financially fragile households were more likely to use BNPL frequently for smaller purchases, with nearly 60% using it more than five times a year.
Despite BNPL offering a way to pay off small purchases over time without interest, concerns are raised about its impact on vulnerable consumers, especially as BNPL becomes widely accessible and normalized. With BNPL not subject to the same regulations as credit card issuers, consumers could face challenges in dispute resolution and may be forced into auto-payments.
BNPL users tend to be younger, and the resumption of federal student loan repayment poses additional financial pressure, particularly for those aged 30 to 50. The research highlights concerns that BNPL may attract consumers with existing financial difficulties, potentially enabling them to spend or borrow beyond their means.
While BNPL can provide a lifeline for some consumers, caution is urged to avoid overextension and potential negative impacts on personal finances.
