Buy Now, Pay Later (BNPL) services like Klarna and Affirm have surged in popularity recently, providing consumers with options to divide purchases into more digestible payments. However, new surveys suggest these services may be related to financial difficulties. According to the Financial Industry Regulatory Authority (FINRA), nearly a quarter of Americans have used a BNPL service in the past year. It was found that such users are also likely to take part in other financial actions that generate fees, such as only repaying the minimum on credit cards, exceeding credit limits, or overdrawing checking accounts.
Unlike other credit options, BNPL services permit consumers to breakdown purchases into smaller without being subjected to typical financial scrutiny or associated interest charges, given that payments are made punctually.
Typically, BNPL users are younger and not exclusively from lower-income brackets. In fact, users from both incomes less than $25,000 and more than $75,000 have used BNPL services in almost equal measure. However, a Lending Tree survey suggests that many who utilize BNPL services do so for living costs like groceries, indicating that these users may be living paycheck to paycheck.
A common misconception among BNPL users is the false idea that timely repayment of their BNPL loans can improve their credit scores. This is not the case, but it doesn't rule out the possibility that this might change in the future. Users must also be mindful of possible fees tied to late or missed payments, and remember that unresolved BNPL loans can end up in collections, which do affect credit reports.
BNPL services can become a complication if misused but may be beneficial when used wisely. The risk of 'debt stacking' creates a probability of consumers getting overwhelmed by debt and misunderstanding the impact on their credit reports. It’s advisable that before agreeing to any BNPL loan, consumers should evaluate their ability to meet the payments, taking into account their other financial obligations.