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This Holiday Season Buy Now, Pay (and Worry) Later

They make it so easy. (Photographer: Bloomberg)

Consumers are spending record amounts shopping online this holiday season. With budgets strained by rising prices, more are opting to load up their carts now and pay later. Sure, buy-now, pay-later, or BNPL, services appear more consumer-friendly than credit cards: Shoppers can make a partial payment upfront and the rest in four or six interest-free installments, and fees for late payments are typically capped. Those perks have drawn in borrowers with fewer financial resources. On average, BNPL customers have weaker credit scores and lower incomes than consumers using other forms of payment when shopping. Still, as the economy turns and the temptation to postpone paying for things grows, so does the risk of overextending. BNPL is still a niche product comprising about 5% of all e-commerce sales in the US, but purchases using this option jumped 85% over the Black Friday shopping weekend compared to the week before, according to Adobe Analytics. By 2024, Insider Intelligence estimates online shoppers staggering payments will spend more than $1,100 annually per user compared with $958 in 2022. Despite the growth potential, the industry is under pressure. The main players — Affirm Holdings Inc., Afterpay, Klarna Inc., and PayPal Holdings Inc. — have struggled this year as consumers pull back on discretionary spending. At the same time, higher interest rates make it more expensive for BNPL providers to borrow the money they lend to shoppers. That can only mean trouble for their customers as firms either become more selective about who they lend to or, more likely, impose fees or other charges to turn a profit.

There are early signs of stress among BNPL borrowers. Charge-offs (when the debt is so far past due that lenders write it off) for BNPL are outpacing credit cards. In 2021, the number of individual borrowers with at least one loan written off rose to 3.79% from 2.93% a year earlier, according to the Consumer Financial Protection Bureau. The charge-off rate for credit cards last year averaged 2.16%. 

What’s more, the charge-off rate may be understated because of how it’s calculated by some providers (in the absence of regulations), according to Michael Taiano, a senior director at Fitch Ratings. 

Late payments are climbing too. Affirm had a delinquency rate (payments overdue by 30 days or more) of 3.8% for the quarter ending Sept. 30, up from 2.6% a year earlier.  At Afterpay, loans with payments past their due date by more than 60 days reached 5.9%. Credit-card delinquency rates for some of the largest issuers were just 1.6% as of Sept. 30, according to calculations by Taiano.  Retailers give BNPL companies about double the fee they pay credit-card firms because shoppers are more likely to complete a purchase if they can break up payments without an additional interest burden, meaning fewer abandoned shopping carts. But once the sale is done, the retailer is off the hook should the shopper default. 

The deal might be good for retailers but could backfire for consumers. There’s no real regulation around what BNPL lenders have to tell agencies that calculate credit scores. So punctual payments usually don’t boost the score. Some providers, however, still report late payments, which could harm a person’s ability to be approved for a mortgage or auto loan down the road. Among borrowers who had at least one late payment, 15% said the information was reflected on their credit report, according to a recent survey by Consumer Reports.Four easy payments for an Apple Watch or Dyson Airwrap sounds tempting during the holiday season. But think before you click. Paying later may end up costing more than you think.

More From Bloomberg Opinion:

• A Soft Landing Is In Sight, But Can the Fed Stick It?: Jonathan Levin & Leticia Miranda

• Holiday Shoppers, Skip the Store Credit Cards: Alexis Leondis

• The Consumer Economy Is Starting to Crack Under Inflation: Andrea Felsted

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Alexis Leondis is a Bloomberg Opinion columnist covering personal finance. Previously, she oversaw tax coverage for Bloomberg News.

Leticia Miranda is a Bloomberg Opinion columnist covering consumer goods and the retail industry. She was previously a business reporter at NBC News and a retail reporter at BuzzFeed News.

More stories like this are available on bloomberg.com/opinion

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