US 'buy now, pay later' splurges raise holiday debt hangover risk

With U.S. credit card balances at record levels and defaults rising, more shoppers than ever are tapping buy now, pay later services on key shopping days to stretch their budgets. Roxanne Ross of Florida is one of a growing number of Americans dodging higher interest rates on credit cards by instead turning to "buy now, pay later" services as they shop for holiday merchandise. As of Monday, she was considering using Klarna to spread the cost of the latest Apple AirPods across four installments that stretch into next year.

A Growing Trend in E-commerce

The increased use of buy now, pay later loans from providers like Klarna, Affirm, PayPal and Afterpay "signal an increase of short-term debt on top of the more than $1 trillion in outstanding credit card balances," said Bruce McClary, spokesman for the National Foundation for Credit Counseling. Consequently, the world's biggest retailer, Walmart, replaced its layaway program with buy now, pay later options through Affirm, setting the stage for the industry's capture of 5% of total e-commerce worldwide.

Retailers pay fees of anywhere from 2% to 8% of the purchase price to buy now, pay later firms. In comparison, credit card processing "swipe" fees run 2% to 4%. These services do check shoppers' credit ratings to determine whether and what rate of interest to charge, but providers told Reuters they are giving shoppers alternatives to the average credit card now charging over 20% interest.

Interest Rates and Financial Risks

While they can be a tool for shoppers, consumer advocates are raising red flags about cash-strapped shoppers who are adding months-long loans with rates that can top out at 36% — the maximum lenders can charge in many states. Most heavily advertise 0% interest, "pay in four" biweekly installment loans. However, at Affirm, for example, interest-free loans accounted for 26% of its products in its latest quarter, while interest-bearing loans stretching as long as five years accounted for 74%.

Data shows that the typical BNPL borrower "already has more debt, is already more financially vulnerable and under stress," said Jennifer Chien, senior policy counsel for Financial Fairness at Consumer Reports. "It feels like the holiday debt hangover could be particularly nasty this year," Bankrate analyst Ted Rossman added.

Purchase Examples and Pricing

Shoppers use these services for everything from luxury fashion to everyday essentials. The following data highlights the range of products and pricing currently available through BNPL options:

• Apple AirPods: $249 (Available via Klarna installments)
• Jil Sander leather tote bag: $3,253 (Marked 30% off from luxury retailer Farfetch)
• iPhone 14 Pro: $699 (51% off the last generation via Walmart)
• Burger King gift cards: Valued at up to $500
• Groceries: Increasing usage as inflation squeezes household budgets

The Impact of Inflation on Essentials

With inflation squeezing budgets, more consumers are turning to instant credit apps to make ends meet. Faith Smith, a 34-year-old administrative assistant, was already using it to buy clothes and school supplies for her young daughter, but now finds herself using it for food. "I can’t just buy groceries out of pocket like I used to," says Smith, who maxes out her credit on BNPL providers such as Afterpay, Klarna and PayPal. "It helps for a week or two, but then you’re stuck with a grocery bill for a couple months."