Chapter 5

The Consumer Financial Protection Bureau (www.consumerfinance.gov) recently conducted a study of Buy Now, Pay Later (BNPL) users.  While many of the respondents did not encounter significant financial stress, BNPL users were much more likely to:

• be highly indebted; have lower credit scores.
• have high credit card utilization rates and revolve the balance on their credit cards.
• have delinquencies with traditional credit products.
• use high-interest financial services such as payday, pawn, and overdraft compared to non-BNPL borrowers.

BNPL borrowers generally have access to traditional forms of credit, using credit and retail cards, personal loans, student debt, and auto loans. The report estimates that a majority of BNPL borrowers would encounter annual credit card interest rates between 19 and 23 percent.

BNPL users tend to be younger. About 22 percent of consumers under age 35 borrowed using BNPL, while approximately 10 percent of those over the age of 65 used the service. Renters (22 percent) were more likely to be a BNPL user compared to homeowners (15 percent).

BNPL borrowing is viewed as less costly than other credit sources, such as credit cards or payday loans. However, consumers need to be aware of the potential concerns. While advertised as “no interest,” late or missed payments can trigger high fees, which can result in paying more than the original cost. BNPL will not improve your credit score, but it could damage it due to missed or late payments. BNPL can be a doorway to financial difficulties, especially if you use it for more than one purchase at a time.  

For additional information on buy now, pay later, click here.

Teaching Suggestions

• Have students talk to someone who has used BNPL to learn about the person’s experience with this credit source.
• Have students create an audio file or podcast with a summary of the benefits and drawbacks of BNPL borrowing.

Discussion Questions 

1. What features of BNPL services are most attractive to consumers?
2. What advice would you give a person who is considering using BNPL?

For a long time, “buy now, pay later” (BNPL) has referred to the use of credit. However, recently a new BNPL approach has surfaced, and is growing. Today, financial technology (FinTech) companies are using a different method to finance consumer purchases.

BNPL providers include Affirm, Afterpay, Klarna, Zip, and PayPal. The BNPL plan allows consumers to obtain a purchase immediately and then make a series of equal payments, often four payments each due two weeks apart. The first payment is due at the time of purchase.

Most BNPL plans charge interest and late fees. These plans often offer financing to customers with bad credit or no credit. BNPL is used mainly for online shopping although the plan is also available in some stores. Purchases of technology, furniture, clothing, beauty care products, groceries, health care services, and to eat at restaurants are the most common uses of BNPL.

The main benefits of BNPL mentioned by consumers, include to:

• spread cost of expensive items over time.
• buy items that they might not otherwise be able to afford.
• avoid credit card debt.
• try out the BNPL method.
• not have to wait until payday to buy an item.

When selecting a BNPL plan, search for those with low or no interest and low or no late fees. Remember when using BNPL, you are still taking on debt. This easy access to credit often results in overspending. Some people will make purchases through multiple plans resulting in greater financial difficulties.

Be sure you can pay on time to avoid late fees and interest charges. Unlike traditional loans, BNPL providers may not report to credit bureaus, so you are not building a credit record.

For additional information on BNPL, click on these articles:

Article #1

Article #2

Teaching Suggestions

• Have students ask if any friends or relatives have used a BNPL plan. Obtain information about their experiences.
• Have students create a visual poster, slide presentation, or video with the benefits and drawbacks of BNPL plans.

Discussion Questions 

1. What aspects of BNPL might create financial difficulties?
   
2. Describe actions a person might take to evaluate a BNPL plan.