The Risks of Buying Now, Paying Holiday Shopping Later: Credit Experts

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Shoppers fill a target store on a Black Friday in Chicago.

John Gress | Corbis History | Getty Images

“Buy now, pay later” has become a popular payment tool among young consumers, replacing traditional bank credit cards. And this year, the biggest brands are adapting to the trendy payment method for the holiday season. But with that comes a warning: defaults on “BNPL” payments have increased and experts fear BNPL is a recipe for overspending.

More than half of all consumers plan to use BNPL within the next year, and that’s good news for traders. Buyers tend to spend more per purchase when using BNPL, according to McKinsey.

The spending option is available for both large and small purchases.

In September, Amazon struck a deal with Affirm that would allow consumers to split purchases of $ 50 or more into smaller monthly payments, a trend that Mizuho analyst Dan Dolev told CNBC’s “TechCheck”. “The big trends we’re looking at are the move towards lower cost items,” Dolev said. “And we see that in the Amazon deal with Affirm.”

Consumer goods, like a pair of shoes, are a space BNPL retailers want to accommodate, according to Dolev, due to the frequency and low risk of purchases. “You are not going to go broke with a pair of shoes.”

Fintechs Square and Paypal also recently bought the BNPL space.

Macy’s, Amazon and Walmart are among the largest retailers that have started offering “buy now, pay later” payment options. In October, Target announced that it would adapt to BNPL ahead of the holiday season to make shopping “more flexible and personalized based on customer needs, just in time for the holiday season,” the company said in a statement.

Target said its partnership with BNPL Sezzle and Affirm companies will allow consumers to pay at the pace that works best for them. “It’s a convenient option during peak holiday season and throughout the year,” the company said.

Sezzle will divide each small purchase, like party favors or holiday pajamas, into four interest-free payments over six weeks. The retailer also suggests that consumers pay for big-ticket items like electronics or new furniture sets with Affirm because of its longer payment period options.

Holiday retail sales have grown steadily over the past decade. In 2000, retail holiday spending totaled $ 400 billion. Similarly, and despite the peak of a global pandemic, 2020 holiday sales have reached nearly $ 800 billion, according to the National Retail Federation, which predicts that sales will set a new record again this year.

In 2021, consumer spending is on the rise, the economy is reopening, and consumers are ready to shop for the holidays.

1 in 3 Americans expect to take on debt this holiday shopping season, according to an October Credit Karma poll. But regardless of how people plan to purchase their vacation items, consumers should be mindful of their spending and any interest or late fees that may be part of credit card or BNPL models.

The booming financial tool offers consumers payout options on instant purchases.

Whether the purchase is made through a BNPL service or a credit card, “consumers need to fully understand the transaction,” said a spokesperson for Affirm.

“People tend to lose their minds financially just around Black Friday,” said John Ulzheimer, a credit expert. “So when you combine a higher delinquency rate with more debt, which happens at the end of the year, because of the holiday shopping activity, you are combining two pretty dangerous things.”

BNPL attracts consumers with its zero-interest financing, but to guarantee zero interest and no fees, consumers must meet certain conditions, such as making payments on time and in full.

Sweden-based fintech company Klarna makes money by charging retailers for offering BNPL to their customers. But if a scheduled payment is overdue, a late fee of up to $ 7 – capped at a maximum of 25% of the overdue amount – is charged to the consumer.

Affirm has no late fees, but charges consumers interest, although it only approves customers for the amount they seek to purchase on their terms, which they can choose to pay back out of three, six or 12 months, and they’re only charged interest on the principal amount (no compounding of interest over time, as is often the case with credit cards when they aren’t fully paid off.) Affirm notes that late payments can affect a consumer’s ability to obtain future loans.

In a Credit Karma survey released in September, 44% of respondents said they had used BNPL’s services and 34% had fallen behind on one or more of these payments. Additionally, more than half of young consumers included in the survey said they missed at least one BNPL payment: “25% of millennials missed one payment, while 30% of Gen Z respondents missed two” , according to the survey.

Klarna claims that less than 1% of its users never pay what they owe. Likewise, Affirm defaults over 30 days were around 1% for the year, according to the Affirm spokesperson. A spokesperson for Klarna said that if buyers miss a payment, the company restricts the use of its services so they cannot accumulate debt.

BNPL regulation is increasing in countries like the UK, which has led companies like Klarna to become stricter on lending.

Historically, young consumers begin to build credit in their early twenties by paying off their credit cards and bills in their name. Credit cards report to credit bureaus and paying them on time results in good credit for the consumer. This credit becomes important to consumers when they apply for loans or mortgages. But not all BNPL transactions are reported to credit bureaus, a factor that Ulzheimer says can seriously undermine the value of the financial approach. Affirm, for example, does not report short-term, interest-free loans. Its interest rates vary from 0% to 30%.

Ted Rossman, senior industry analyst at Bankrate.com, says that if the consumer is responsible and BNPL is on budget, it could be a useful tool, but ultimately, just like credit cards, it can also be a slippery slope. “If you spend too much, pay late and rely on it too much, [buy now pay later] could be bad. ”

He says consumers should see it as “more of a stepping stone.”

“It could be used selectively, but I wouldn’t put all of my eggs in this basket long term, because then you will miss out on other benefits.”


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