Payment plan purchases are becoming increasingly popular for online shopping, but that also means that a growing number of people are falling delinquent on their debts. These buy-now-pay-later systems can be used to buy anything from groceries to furniture, and everything in between.
Especially since the beginning of the pandemic, financial service companies like PayPal
These types of short-term loans are particularly popular amongst low-income and young shoppers who are warier of racking up credit card debt. While buy-now-pay-later systems often don't charge interest like a traditional credit card, many borrowers still end up borrowing more than they can afford thanks to the way the system operates.
Also unlike credit cards, these payment plans aren't centrally reported, meaning your purchases may not appear on your credit report, potentially opening the door to excessive borrowing. This "blind spot" can be particularly dangerous for less experienced borrowers, like those who favor buy-now-pay-later options, according to analysts.
"You have an industry with a higher concentration of subprime borrowers in a market that hasn't been effectively tested through (this type of economy), and you have a kind of a toxic brew of concerns," Fitch Ratings analyst Michael Taiano, who wrote a report on the payment plan system, said.
Along with over-borrowing, analysts have also expressed concerns over the potential problem of late fees which can quickly make an otherwise low-cost purchase incredibly expensive.
According to the Consumer Financial Protection Bureau (CFPB), as buy-now-pay-later programs become more prevalent, so too do debtor delinquencies.
Delinquencies rapidly increased in the lead-up to April 2022 before leveling off, and a growing number of loans are being "charged off", meaning payments are so late that it's unlikely that the debt will ever be repaid. The rate of charge-off loans increased from 1.83% in 2020 to 2.39% in 2021.
"This upward trend on delinquencies is continuing," CFPB Director Rohit Chopra told reporters.
Initially, buy-now-pay-later plans were seen as a positive alternative to credit card debt, but credit reporting companies like TransUnion
With a growing number of consumers using payment plans for routine essentials, consumer advocates are increasingly concerned about the snowball effect these purchases can have.
"If these buy now, pay later plans are not adequately budgeted for, they can have a cascading impact across a person's entire financial life," financial planning expert and former Morgan Stanley advisor Andre Jean-Pierre said.
On the other hand, the buy-now-pay-later providers say that they're improving consumers' financial position. According to Financial Technology Association CEO Penny Lee, payment plans help "consumers manage their cash flow responsibly and live healthier financial lives." Other executives, like Affirm CEO Max Levchin, say that the bump in delinquencies is to be expected in a growing industry.
"We have seen some stress (among those with the lowest credit scores), and those are starting to have a hard time," Levchin said. "I would not call it a sort of preamble to a potential downturn, but it's not the same kind of a smooth sailing it's been."
