Everyday Purchases on 'Buy Now, Pay Later' Plans: One Financial Expert Believes It's Highly Risky
Buy Now, Pay Later (BNPL) services like Klarna and Affirm have become increasingly popular, allowing consumers to defer payments for purchases such as groceries, gas, and clothes over several months. However, these services come with potential risks and consequences, primarily related to debt accumulation, credit impacts, and financial vulnerability.
Hidden and Accumulating Debt
One of the main concerns is the opacity surrounding BNPL loans. Many BNPL loans are not reported to credit bureaus in the same way traditional credit lines are, allowing consumers to take multiple BNPL loans concurrently ("stacking"), leading to significant unsecured debt buildup without clear visibility to lenders or the consumers themselves.
Credit Score Implications
Incorporating BNPL data into credit scoring models can have mixed effects. While it can help build formal credit history, it can also amplify harm if borrowers, especially young or inexperienced users, miss payments or have overlapping obligations they do not fully understand. Missed payments or overlapping BNPL loans can lead to penalties and negatively affect credit scores, with wide-ranging consequences such as increased loan rejection and limited access to housing or other financial products.
Regulatory and Underwriting Risks
BNPL debts are often not accounted for fully in mortgage underwriting or other lending decisions because traditional underwriting guidelines may disregard short-term debts like BNPL if expected to be resolved quickly. This can lead to underestimation of a borrower's true financial obligations, increasing the risk of delinquency or foreclosure.
Late Fees and Financial Stress
Many BNPL users miss payments, incurring often hefty late fees or facing aggressive debt collection practices. This can exacerbate financial stress, particularly among younger consumers who form a significant portion of BNPL users.
Financial Education Gaps
Many users, especially Gen Z, gained their first credit experience through BNPL products but often without sufficient financial education. This leads to misunderstandings about the obligations and risks involved, potentially fostering poor financial habits over time and increasing vulnerability to debt cycles.
Broader Economic Implications
Widespread BNPL usage combined with limited financial literacy can weaken individual financial stability and broader economic resilience, especially as consumer debt and delinquency rates rise to post-recession levels. The growth of BNPL into necessity spending (e.g., groceries, electronics) risks normalizing debt to meet essential needs rather than just discretionary consumption.
In conclusion, while BNPL products offer convenience and can improve financial inclusion, they carry significant risks such as hidden debt buildup, credit score penalties, late fees, and financial stress, especially when users lack proper education or when regulatory oversight is insufficient. Careful record-keeping is essential to avoid overspending and burdensome installment payments when using BNPL for ordinary purchases.
This article was written by a contributing adviser to the Kiplinger Building Wealth program, not the Kiplinger editorial staff. The advisers featured in this article have certifications including CFP®, ChFC®, IAR, AIF®, CDFA®, and their records can be checked through the SEC or FINRA.
- Concealed debt accumulation is a primary concern with Buy Now, Pay Later (BNPL) services, as many users may unknowingly accrue significant unsecured debt due to the lack of transparency surrounding BNPL loans and the practice of "stacking" multiple loans.
- Incorporating BNPL data into credit scoring models could potentially aid in building formal credit histories, but it could also expose borrowers to decreased credit scores and increased financial restrictions if they miss payments or fall behind on overlapping BNPL loans.
- Regulatory oversight is crucial in managing the risks associated with BNPL, as many short-term debt obligations are not fully accounted for in mortgage underwriting or other lending decisions, leading to underestimation of a borrower's true financial obligations and increased lending risks.
