New generations of young Americans are finding themselves increasingly riddled with debt. There are the steep and, for many, insurmountable rental and mortgage rates in an extremely competitive housing market. There are the rising prices of basic consumer goods amid inflation at a forty-year high. There are the stagnating entry-level salaries for both the college and non-college-educated workforce. And, of course, there are the ever-climbing costs of higher education—only partially remedied by President Joe Biden’s new debt forgiveness plan.
Despite these stressors, Gen Z-ers and younger millennials are still somewhat willing to splurge on entertainment, travel, and apparel. And, as in any situation where consumers’ financial stability is tenuous but the incentive to spend is high, lenders are cashing in.
During the early days of the COVID-19 pandemic, when the online shopping sector boomed, consumers were increasingly served up an enticing option: For a fraction of the total cost, they could now choose to split an online purchase into a series of payments via an interest-free “buy now, pay later” (BNPL) loan through various third-party services. This meant that the initial charge for, say, a pair of luxury leggings could, at the click of a button, melt away from $99 into four monthly installments of $24.75. People could now more easily afford items that would otherwise be out of their budget, retailers could benefit from increased sales, and BNPL companies could profit from charging a fee to retailers, typically 2 to 8 percent of each sale made using these loans—slightly higher than the fees credit card companies normally charge.
The concept is nothing new; from Singer’s dollar-a-week payment plan for its sewing machines back in the nineteenth century, to brand-name credit cards, to the layaway plans once commonly offered by brick-and-mortar department stores, delaying payment-in-full has always been an alluring option. But by essentially inventing a modern, “pay-in-four” installment plan version of these previous models, leading BNPL companies such as Affirm, Afterpay, and Klarna have successfully launched a global market that has been estimated to be worth $132 billion as of 2021, and is on track to reach $3.7 trillion by 2030.
From 2018 to 2021, the number of BNPL users in the United States rose by more than 300 percent each year, with a 2020 McKinsey & Company survey finding that “about 60 percent of consumers say they are likely to use POS [point-of-sale] financing over the next six to twelve months.” And whereas BNPL’s predecessors were designed with an eye for financing expensive investment items like furniture or technology, and even sometimes cars, with the average transaction value for BNPL loans being in the hundreds rather than thousands of dollars, this new form of delayed payment is intentionally designed for more frequent and casual use.
From 2018 to 2021, the number of “buy now, pay later” users in the United States rose by more than 300 percent each year.
The caveat is that some of these companies will penalize late or missed payments with late fees, banks may charge overdraft fees, and practically all warn that missing payments can result in a damaged credit score as well as unpaid balances being passed on to debt collectors. Though these practices are standard fare for most types of loans, the convenience and broad accessibility of these new financial products are raising concerns about their impact on consumers, especially young people who are a major target demographic for credit card and loan companies.
BNPL companies advertise themselves as a safer and more accessible alternative to credit cards. Many marketing strategies, such as a recent Affirm press release touting that Gen Z and millennial consumers “find credit card companies nearly as untrustworthy as car salespeople, and trust their ex more than both,” work to underscore the differences between BNPL loans and traditional credit cards.
A 2020 holiday ad features celebrity Keke Palmer rethinking opening a new credit card after reading from a lengthy scroll of a hypothetical credit card company’s fine print. “What are you going to do? Use Affirm instead, pay at your own pace, and never deal with hidden fees?” a disembodied voice asks. (Her answer: Well, yes. #GiftsNotGotchas.) And Australia-based Afterpay has Rebel Wilson in an ad describing BNPL loans as “if credit cards and cash had a baby”—in short, the best of both worlds.
But many consumer advocates say that if all this sounds too good to be true, it might be.
In 2009, Congress enacted the Credit Card Accountability Responsibility and Disclosure (CARD) Act, amending the landmark 1968 Truth in Lending Act, which cracked down on predatory lending practices. It can be broken down into three action points: accountability, because the law bans credit card companies from profiting from certain types of hidden fees; responsibility, because it prohibits the excessive targeting of youth in places such as college campuses and puts in place a cosigner or “proof of income” requirement for people under twenty-one; and disclosure, because it forces credit card companies to standardize their disclosures with clearer and less evasive language, as well as giving credit card users clear and advance notice of additional charges or interest rate spikes.
Today, fewer young adults use credit cards than in 2009, in part thanks to the CARD Act. But that doesn’t mean that young people don’t still struggle with credit card debt. In February 2020, NPR reported that U.S. credit card debt had reached an all-time high of almost $1 trillion, with 10 percent of eighteen- to twenty-nine-year-olds carrying a balance that was more than ninety days overdue. Correspondent Chris Arnold commented that the trend was a “pretty big red warning light on the dashboard for some economists” because delinquency rates—the amount of debt past due—were inching closer and closer to levels seen during the Great Recession from 2007 to 2009.
BNPL companies say their products promote responsible financing by helping curb the kind of high-interest, revolving debt associated with credit cards and payday loans.
“Our practices have been designed to be aligned with consumers, whether it’s disclosures, or no late fees, and providing this responsible access to credit,” Affirm’s Director of Financial Communications Matt Gross tells The Progressive. “Credit is a good thing,” he says. “Credit is a tool for enabling people to get goods and services. I think what’s bad is debt. Now, what is debt? Debt is, to me, when you are compounding and revolving, paying interest on interest, and it’s a perpetual cycle.”
As young people delay obtaining credit cards and instead rely increasingly on debit cards, Gross says it’s becoming more difficult to build the robust credit history required for financing bigger purchases without high interest rates. BNPL plans, he says, allow for consumers to “responsibly have access to credit and engage in it in a constructive way.”
But do they? Most pay-in-four, no-interest BNPL loans are not reported to credit bureaus. Some companies such as Afterpay claim they don’t currently run credit checks or report any data, including information on delinquencies, to credit bureaus, while Affirm says that it reports at least some kinds of loan delinquencies to Experian along with the individual’s entire payment history.
Even though BNPL companies will generally lock accounts after late payments, preventing consumers from spending more until their balance is paid up, recent studies suggest BNPL users are struggling well before they begin to miss payments. Bloomberg reported in June on a survey by U.K.-based Citizens Advice that discovered that 42 percent of BNPL users had to borrow money to make their installment payments on time. A 2021 Credit Karma survey found that 34 percent of respondents that used BNPL loans fell behind “on one or more payments,” and 72 percent said that their credit score might have dipped as a result. (Individual BNPL companies’ internal data report different figures; Afterpay told The Progressive in an email that between June 2021 and June 2022, 95 percent of the company’s installment payments were paid on time.)
Recent studies suggest BNPL users are struggling well before they begin to miss payments.
Reporting by Protocol additionally shows that even a history of on-time payments can negatively impact a user’s credit score. This is because major credit bureaus treat each online checkout using a BNPL loan like the opening of a new line of credit as opposed to a “revolving” line of credit—that is, as a form of credit card. That means that based on FICO Score metrics, one of the primary ways that credit bureaus calculate a credit score, BNPL users that do have their loans reported can take a hit each time they choose to pay in installments. And while most BNPL companies say that they want to see their products become vehicles for improving credit scores, some are simultaneously pushing back on the possibility of viewing their products as forms of “credit” at all.
Ultimately, the lack of a consistent standard for reporting to credit bureaus across the BNPL industry, as well as the lack of a unified definition for what these plans even are—both legally and in layperson’s terms—can make it more difficult to assess whether people applying for these loans have the financial ability to pay them back. There’s little to prevent, for example, consumers from opening up BNPL loans with multiple companies and for future lenders not to be able to see applicants’ whole financial pictures when approving them for new lines of credit. This is further compounded by the fact that BNPL companies almost entirely run either a “soft” credit check or no credit check at all, purportedly to give users who might not be approved for other types of financing access to credit.
As these lending options expand beyond the realm of apparel and home furnishings into everyday spending, the possibility of overextending one’s finances and stacking debt across multiple services becomes a dangerous pitfall. It’s one of the multiple concerns about BNPL lending models that consumer advocates are trying to address.
In December 2021, the Consumer Financial Protection Bureau (CFPB) opened an inquiry into five BNPL companies—Affirm, Afterpay, Klarna, PayPal, and Zip—to “collect information on the risks and benefits” they pose to consumers. Among the issues the CFPB identified were concerns about debt accumulation, “regulatory arbitrage” or the way that companies can design their products to avoid the legal obligations of some consumer protection laws, and data harvesting.
Seventy-seven consumer advocates and various nonprofits signed on to a letter in support of expanding federal regulation to more explicitly include BNPL loans: “We urge the CFPB to view BNPL products as credit cards covered by the Truth in Lending Act (TILA), to enact a larger participant rule to supervise this market, and to look out for practices that harm consumers.”
Among the signers was the Student Borrower Protection Center (SBPC), an organization co-founded in 2018 by Mike Pierce, a leading CFPB regulator who left the bureau in protest of the Trump Administration’s efforts to water down its power and authority. “The effects of these products on consumers are real, and they’re risky,” SBPC’s Director of Research and Investigations Ben Kaufman tells The Progressive.
According to reporting by The Washington Post, none of the five companies said they were opposed to efforts for greater transparency. But Kaufman says that consumer advocates should be skeptical that BNPL companies would accept regulation parsing out gray areas in the law, such as the loophole that pay-in-four loans technically fall just below TILA’s five-installment threshold for what it considers to be credit. “The fact of the matter is that they’re lying to you. It is not correct that [BNPL companies] are simply passive observers asking for gray areas to be expelled. They are in fact actively lobbying for their interests on the Hill, and I guarantee you that if they get regulation that they don’t like . . . they will fight against it,” he says.
Kaufman says that the phrase buy now, pay later “is literally the definition of financing a purchase,” adding that “certain lenders have very intentionally structured their product to fall outside certain [legal] definitions of credit.”
Consumer advocacy groups like SBPC say the bottom line is that entering into an installment payment plan, whether it be through a loan, a credit card, or a hybrid of the two, is still an act of borrowing and taking on debt—no matter how temporary that debt may seem to be. At best, BNPL loans offer users the opportunity to finance purchases that they could not otherwise afford to pay in full, usually without interest, while providing sleek and easy-to-use platforms for doing so. But at worst, they can encourage overspending, potentially hurt consumers’ credit scores, and present BNPL users, especially young adults, with a short-term financing mindset that lends itself to long-term woes.
As younger generations struggle to make it paycheck to paycheck, legislators, consumer advocates, and BNPL companies alike should be alarmed about these new avenues for accruing further debt when Americans are already drowning in it.