Surge in 'Buy Now, Pay Later' Expected During Holiday Season, Raising Concerns

As the holiday season approaches, consumers are predicted to rely heavily on "buy now, pay later" (BNPL) payment plans, presenting a boon for retailers. However, credit experts again sound alarm bells over the potential risks associated with these short-term installment loans.

BNPL plans allow shoppers to make an initial payment at checkout and then pay the remaining balance in instalments over weeks or months, offering a convenient option for those juggling various financial commitments during the holiday season. While these loans often come with consumer-friendly interest rates, experts raise concerns about their potential to make borrowing too easy and lead consumers into excessive debt.

According to the data, younger consumers and those facing difficulty accessing credit are the primary users of BNPL loans. The Federal Reserve Bank of New York acknowledges that, when used responsibly, these installment plans contribute to financial inclusion. However, the Fed and some analysts emphasise the risks associated with specific features that can lead to consumers accumulating significant debt.

In October alone, short-term installment loans drove $6.4 billion of online spending, marking a 6% year-over-year increase, according to a report by Adobe Analytics. The usage of BNPL is expected to peak in November, with spending projected to reach $9.3 billion, including a record $782 million on Cyber Monday. Adobe estimates that one in five Americans uses BNPL plans for holiday gift purchases.

The BNPL model typically involves a soft credit check, an initial down payment, and an agreement to make four to six payments at two-week intervals. Zero-interest loans are often offered initially. Late or missed payments can result in consequences such as being shut out of the app or facing additional interest or fees.

While retailers benefit from increased business and larger cart sizes due to BNPL options, concerns arise over the potential for consumers to accumulate debt with multiple lenders. Most short-term loans of this nature are not reported to credit bureaus, which experts identify as a problematic feature, leading to a phenomenon known as "loan stacking."

Consumers appreciate that these loans do not impact their credit scores, but experts worry that the lack of reporting poses challenges for lenders in assessing creditworthiness. The opacity of the BNPL space, combined with the increasing number of companies offering these loans, raises risks for lenders.

Despite concerns, some consumers find BNPL plans valuable for managing their budgets. However, the ease of access to credit and the potential for debt accumulation emphasise the need for responsible use and ongoing scrutiny of the BNPL industry.