Why ‘Buy Now Pay Later’ could be wrecking your financial future

Buy now pay later users are increasingly paying much later.

Klarna, one of many companies that allow users to purchase something now and pay in installments over time, said last month consumer credit losses in the first three months of the year rose 17% from a year ago as users struggled to make payments. That confirmed earlier surveys showing a similar uptick. A survey by LendingTree showed 41% of users paid late at least once in the past year, up from 34% a year ago. Bankrate’s survey showed 18% missed a payment.

With the economy slowing and big pandemic savings long gone, financial advisers are warning users, who tend to lean younger, BNPL could be wrecking their financial future.

“If using BNPL, it’s likely you don’t have savings to cover the costs of making purchases,” said Rick Miller of Miller Investment Management. “Saving for retirement is likely not even a thought in your mind. You need to pay yourself first and shouldn’t be spending what you can’t afford.”

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Americans often use BNPL to purchase a good or service they can’t currently afford. They make an initial payment and spread out the rest of the cost over time and pay in installments. In essence, they’re taking a loan for the balance.

A quarter of BNPL users say they’ve used the loans to buy groceries, said LendingTree’s survey of 2,000 U.S. consumers ages 18 to 79 from April 2 to 3. That’s up from 14% just a year ago, amid rising prices at the supermarket, it said.

A third of users see BNPL as a “bridge” to their next paycheck, LendingTree said. That’s up from 30% last year and 27% the year before.

Clothing, including shoes and accessories, is the item most commonly bought using BNPL, followed by technology devices and home décor, LendingTree said.

The average purchase amount was $142 in 2022, the most recent year of data, according to the Consumer Financial Protection Bureau (CFPB). However, it noted approximately 63% of users had multiple BNPL loans.

• Overspending: “Relying on BNPL and short debt gives consumers a false sense of affordability, making it easier to overextend financially,” said Haiyan Huang, chief credit officer at Prosper.

• Limiting future borrowing: “If BNPL is helping you make purchases you cannot afford to pay back, then your credit score could take a hit,” especially if you miss payments, Miller said. “This can hinder your ability to borrow in the future, which could be crucial as you get older and seek a mortgage (or) car loan.”