Why “Buy Now, Pay Later” Loans Are Leaving More Shoppers Struggling
NEW YORK (AP) — An increasing number of Klarna customers are encountering difficulties with repayment.
their “purchase now, pay afterward” loan options
This week, the short-term lender stated. This revelation aligns with reports from lending platforms like Bankrate and LendingTree, noting a rising percentage of “buy now, pay later” customers admitting to payment delinquencies.
Late or missed payments indicate
faltering financial health
among a segment of the US population, some analysts say, as the nation’s total consumer debt rises to a record $18.2 trillion and the Trump administration moves to
gather payment for federal student loans
.
Customers choosing to pay for their buys via BNPL services are typically younger compared to the typical shopper, and they
research from the Federal Reserve
Last year indicated that Black and Hispanic women were particularly prone to utilize these plans, which are being progressively adopted by customers across various income brackets.
The researchers behind the Federal Reserve study noted that although BNPL offers credit to economically susceptible individuals, these very consumers might be taking on too much debt. This worry aligns with earlier studies indicating that shoppers tend to spend more when they have access to BNPL at checkout. Additionally, this practice can result in higher overdraft fees and increased credit card interest charges and penalties.
As Klarna expands its customer base and boosts revenues, the Swedish firm reported that first-quarter consumer credit losses increased by 17% from the same period last year, totaling $136 million.
A representative for the company stated in an official release that the rise was mainly due to the greater volume of loans issued by Klarna compared to the previous year. At a worldwide scale, the portion of these loans that remained unpaid increased from 0.51% in the initial quarter of 2024 to 0.54% currently, yet they noted “no indication of weakening demand” from American consumers.
A growing number of shoppers are opting for ‘buy now, pay later’ options.
Typically, buy now, pay later options allow customers to divide their purchase payments into three or four installments, usually requiring an initial deposit at the time of checkout.
The loans
are typically marketed as zero-interest, and most require no credit check or a soft credit check.
Buy Now Pay Later (BNPL) companies advocate for their services as a more secure option compared to conventional credit cards, particularly when interest rates soar. Additionally, the rising adoption of these installment plans and the increasing variety of scenarios where they can be utilized have drawn significant public scrutiny.
When Klarna declared a collaboration with DoorDash back in March, this announcement sparked online discussions regarding Americans borrowing money just to order delivery. A similar doubt arose after Billboard disclosed that over fifty percent of Coachella’s participants utilized payment installments to cover their festival tickets.
A report released in April by LendingTree indicated that roughly 40% of individuals using buy now, pay later options reported having missed at least one payment over the previous year, an increase from approximately 33% the prior year. A separate study published in May by Bankrate revealed that around 25% of these loan takers opted for such services primarily due to their more accessible approval process compared to conventional credit cards.
The top six Buy Now Pay Later (BNPL) companies—Affirm, Afterpay, Klarna, PayPal, Sezzle, and Zip—Issued approximately 277.3 million loans totaling $33.8 billion worth of goods in 2022. This figure represents roughly 1% of all credit card expenditures for that same year, as reported.
Consumer Financial Protection Bureau
.
A sector experiencing reduced regulatory oversight
This month, the federal agency stated that they do not plan to enforce a
Biden-era regulation
This was intended to impose stricter limits on fintech lenders.
The rule
Handle buy now, pay later loans as conventional credit cards under the Truth In Lending Act, mandating disclosures, refund procedures, a structured dispute mechanism, and additional safeguards.
The rule, implemented last year, also prohibited lenders from compelling borrowers into automated payments or imposing several charges for a single overdue payment.
The Trump administration stated that their choice not to enforce certain measures was “aimed at prioritizing resources towards assisting diligent American taxpayers.” They also mentioned that they would “concentrate their enforcement and oversight efforts on significant risks to consumers, with special attention to service members and veterans.”
Consumer advocacy groups argue that in the absence of federal regulation, customers looking for reimbursements or seeking transparent details regarding BNPL fees and interest rates will have limited legal options available to them.
Taking out installment loans comes with certain risks.
Experts in the industry highlight that one of the major risks associated with Buy Now Pay Later (BNPL) usage is consumers opting for loans they cannot realistically repay. Since credit bureaus do not monitor this type of financial instrument, there are limited protections and reduced regulatory scrutiny.
Justine Farrell, who leads the marketing department at the University of San Diego’s Knauss School of Business, stated that when individuals fail to make their loan payments promptly, it exacerbates the financial strain they are already facing.
Individuals are feeling their finances stretched thinner than they have in quite some time,” stated Farrell, an expert in consumer behavior and BNPL services. “With food costs rising alongside rents and other products… consumers are utilizing the option to defer payments for purchases.
The Consumer Federation of America along with various oversight groups has voiced worries over the reduction in BNPL regulations as the usage of these loans keeps increasing.
“By adopting a bury-your-head-in-the-sand attitude towards the emerging world of fintech loans, the newly appointed CFPB is prioritizing big tech companies over ordinary individuals,” stated Adam Rust, who leads financial services at the Consumer Federation of America.
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Lana Rivera, Canadian Press