How Buy Now, Pay Later Services Diminish Financial Stability

Rather than using Buy Now, Pay Later services, enjoy a granite con brioche for less than 10 euros!

The majority of Americans have used Buy Now, Pay Later (BNPL) services to make a purchase.  BNPL loans allow consumers to pay for a purchase in several installments, interest free.  The most common BNPL loans let consumers pay for items between $50 and $1,000 in four equal installments.  Consumers can access these loans regardless of their credit score while avoiding credit card applications.

Does that sound too good to be true?  It is!  Late payments come with high penalties (often including retroactive interest), and some BNPL loans are no longer interest-free.  A growing number of longer-term BNPL loans have higher APRs than credit cards.

Even so, BNPL loans historically felt like a relatively consequence-free loan because they did not impact an individual’s credit score.  That is changing.  FICO will now incorporate BNPL loan data into its credit scoring model, and other credit bureaus are considering how to do the same.

The Impact of BNPL Loan Data in Credit Scores

Including BNPL loans in credit scores is not entirely bad for consumers.  When you are young and have minimal expenses, it can be difficult to establish credit.  In theory, a high schooler could now use BNPL loans to establish good credit by paying each installment on time and in full.  When that high schooler becomes an adult, their better credit score will provide more opportunities to obtain a rewards credit card, pass a credit check to secure an apartment, or get a decent rate on a car purchase.

Unfortunately, more consumers will feel negative impacts when BNPL loan data is incorporated into credit scoring models.  Consumers using BNPL already have lower average credit scores and checking account balances than consumers who avoid BNPL services.  A missed payment on a BNPL loan will now exacerbate preexisting credit problems for these consumers.  In other words, the incorporation of BNPL loan data into credit scores is likely to further hurt those with poor credit scores.

How BNPL Loans Destabilized Consumers

Despite this negative impact, BNPL loan data absolutely should be incorporated into credit scores.  These are loans.  The danger to consumers’ finances are BNPL loans themselves.  The installment system gradually made consumers comfortable purchasing smaller and smaller items with loans rather than paying in full.

Using loans for purchases is a reality of modern society when we make large purchases.  Nobody blinks at the decision to obtain a mortgage, but we recognize that a 15-year mortgage is preferable to a 30-year mortgage, and a lower interest rate is ideal.  Even when we accept the reality of obtaining a loan, we know shorter loans are preferable.

But limiting ourselves to loans on only the largest purchases is key to optimizing our financial stability.  Car loans followed mortgages, normalizing using loans for what is usually the second-largest purchase in our budgets.  Then layaway services allowed consumers to pay for large appliances or furniture over time, but consumers felt obligated to complete payments because they did not receive the appliance or piece of furniture until payment was complete.

We used to consider loans a solution for large purchases: houses, cars, college, large appliances, furniture, unpredictable health emergencies, or starting a business.  BNPL loans shifted that view, making consumers think loans are acceptable to buy anything.  

BNPL loans started with impulse buys in the apparel industry but have quickly expanded to electronics, travel, entertainment, exercise equipment, furniture, home appliances, and even groceries.  A quarter of Americans have used BNPL loans to purchase groceries.  More and more Americans are using BNPL services to cover everyday expenses, but they are also using BNPL loans to cover optional expenses, from concerts to new headphones, that should wait until the consumer has the funds to cover them in full.

BNPL loans have sent consumers tumbling into a budgeting crisis where they have no idea what luxuries—or basic necessities—are within their budget.  Americans have no need to know how much money hits their bank account because they have a series of revolving BNPL installments for any given purchase.  As more of these loans accumulate, financial stability decreases.  Paying to see Taylor Swift in four installments leads to paying for the Eras Tour accessories in four installments, and that eventually leads to paying for eggs in four installments because that same consumer still has to service their prior debts.

How Did We Get Here?

Consumerism.  BNPL consumers make more purchases during large retail sales or deal events, like Prime Day and the holidays, when spending often ticks up for consumers.  Our economy thrives on the excessive purchases made by consumers, and it more often gives them occasion to justify more buying that would seem normal.

Once a consumer falls into the trap of financing small purchases, one leads to another because servicing past debts takes up a larger percentage of the consumer’s budget.  Practically speaking, these consumers do not operate with the guidance of a loose budget, instead working to pay off installments of BNPL loans like a game of whack-a-mole.

It is easy to plead helplessness and blame our consumerist society if you fall into this trap.  But the reality is:

1. If you do not use BNPL loans, you never need to start.

2. If you already have BNPL loans and are on the hook for some installments, you can get out of the cycle.

Sure, consumerism encourages terrible financial behavior, but you do not have to accept this reality as your fate.  I have never used a BNPL loan, and I never will.  I paid for my car with cash, there is no way I will pay for a sweatshirt over four installments.  If I don’t have the money for the sweatshirt, then I don’t buy the sweatshirt!

Getting Out of the BNPL Loan Cycle

It is easier to stay out of the BNPL loan cycle than to get out of it, but you can get out of it more easily than a lot of debt cycles.  The positive aspect for escape purposes is the short term of BNPL loans.  Most are over periods of only a few weeks or months, so paying them off in full is a short-term project.  This is much easier than knocking out student loans or extreme credit card debt.

Getting out of the BNPL loan cycle means buckling down for a few months.  Pay for your groceries in full, pay off the outstanding BNPL installments, and make no new optional purchases.  To be clear on this, optional purchases include any clothing or accessories, technology upgrades, travel expenses, events or experiences, household appliances, or dining at restaurants or fast food establishments.  If you are completely underwater, this also includes subscriptions from Netflix to Equinox—and while you are at it, get rid of that Amazon Prime subscription.  If you need to escape the BNPL loan cycle, you need time away from sources that encourage you to buy, and none is bigger than Amazon.

If this sounds like not much fun, that is probably true.  But this not-fun time will likely last fewer than three months and eliminate all outstanding BNPL loans for which you are responsible.  Once they are gone, you can add back your subscriptions and reasonable sources of fun.  Removing recurring payment installments will help you see how much money you actually have for the fun things, and this can feel empowering as you decide how to spend money you actually have.

It is worth a little discomfort to get out of the BNPL loan cycle and reestablish your financial stability.  The peace of mind that comes with financial stability is much more valuable than any football game purchased in four installments.  Instead of consumerism, enjoy financial peace.